UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number 1-12368
TANDY LEATHER FACTORY, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware
75-2543540
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

1900 Southeast Loop 820, Fort Worth, Texas  76140
(Address of Principal Executive Offices) (Zip Code)

(817) 872-3200
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files). Yes [X]  No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
Shares outstanding as of November 10, 2013
Common Stock, par value $0.0024 per share
10,198,733

 
 
 




TANDY LEATHER FACTORY, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013


TABLE OF CONTENTS


 
PAGE NO.
   
PART I.  FINANCIAL INFORMATION
 
   
  Item 1.  Financial Statements
 
   
  1
  2
  3
  4
  5
  6
   
  9
   
  13
   
  13
   
PART II.  OTHER INFORMATION
 
   
  13
   
  13
   
  14
   
SIGNATURES
  14
   


 
 

PART I  FINANCIAL INFORMATION

Item 1. Financial Statements.

Tandy Leather Factory, Inc.
Consolidated Balance Sheets

 
September 30,
 2013
(unaudited)
 
December 31,
 2012
(audited)
ASSETS
     
CURRENT ASSETS:
     
 
Cash
$6,289,550
 
$7,705,182
 
Accounts receivable-trade, net of allowance for doubtful accounts
     
     
of approximately $30,000 and $112,000 in 2013 and 2012, respectively
945,725
 
822,772
 
Inventory
29,492,488
 
25,862,784
 
Prepaid income taxes
6,106
   
 
Deferred income taxes
340,426
 
349,478
 
Prepaid expenses
1,845,862
 
776,463
 
Other current assets
429,522
 
153,450
       
Total current assets
39,349,679
 
35,670,129
       
PROPERTY AND EQUIPMENT, at cost
19,042,844
 
17,574,895
Less accumulated depreciation and amortization
(5,645,113)
 
(5,630,305)
 
13,397,731
 
11,944,590
       
GOODWILL
986,153
 
990,725
OTHER INTANGIBLES, net of accumulated amortization of approximately
     
 
$612,000 and $582,000 in 2013 and 2012, respectively
114,643
 
145,533
Other assets
337,115
 
336,695
 
$54,185,321
 
$49,087,672
       
LIABILITIES AND STOCKHOLDERS' EQUITY
     
CURRENT LIABILITIES:
     
 
Accounts payable-trade
$2,299,450
 
$1,612,627
 
Accrued expenses and other liabilities
5,913,564
 
5,928,798
 
Income taxes payable
-
 
113,705
 
Current maturities of long-term debt
202,500
 
202,500
       
Total current liabilities
8,415,514
 
7,857,630
       
DEFERRED INCOME TAXES
987,617
 
806,525
       
LONG-TERM DEBT, net of current maturities
2,446,875
 
2,902,500
       
COMMITMENTS AND CONTINGENCIES
     
       
STOCKHOLDERS' EQUITY:
     
 
Preferred stock, $0.10 par value; 20,000,000 shares authorized;
     
   
none issued or outstanding; attributes to be determined on issuance
-
 
-
 
Common stock, $0.0024 par value; 25,000,000 shares authorized;
     
   
11,192,356 and 11,156,065 shares issued at 2013 and 2012, respectively;
     
   
10,198,733 and 10,162,442 shares outstanding at 2013 and 2012, respectively
26,862
 
26,775
 
Paid-in capital
5,892,907
 
5,767,508
 
Retained earnings
39,019,381
 
34,241,875
 
Treasury stock at cost (993,623 shares at 2013 and 2012)
(2,894,068)
 
(2,894,068)
 
Accumulated other comprehensive income
290,233
 
378,927
       
Total stockholders' equity
42,335,315
 
37,521,017
 
$54,185,321
 
$49,087,672




 





The accompanying notes are an integral part of these financial statements.


Tandy Leather Factory, Inc.
Consolidated Statements of Income
(Unaudited)
For the Three and Nine Months Ended September 30, 2013 and 2012


 
THREE MONTHS
 
NINE MONTHS
 
2013
 
2012
 
2013
 
2012
NET SALES
$18,524,604
 
$17,000,728
 
$56,735,444
 
$52,082,061
               
COST OF SALES
6,823,661
 
6,595,958
 
21,183,551
 
19,371,456
               
          Gross profit
11,700,943
 
10,404,770
 
35,551,893
 
32,710,605
               
OPERATING EXPENSES
9,295,590
 
9,759,914
 
28,179,616
 
27,046,801
               
INCOME FROM OPERATIONS
2,405,353
 
644,856
 
7,372,277
 
5,663,804
               
OTHER INCOME (EXPENSE):
             
          Interest expense
(51,021)
 
(59,623)
 
(158,659)
 
(176,251)
          Other, net
13,777
 
(2,787)
 
138,800
 
59,786
               Total other income (expense)
(37,244)
 
(62,410)
 
(19,859)
 
(116,465)
               
INCOME BEFORE INCOME TAXES
2,368,109
 
582,446
 
7,352,418
 
5,547,339
               
PROVISION FOR INCOME TAXES
806,277
 
301,676
 
2,574,912
 
2,152,825
               
NET INCOME
$1,561,832
 
$280,770
 
$4,777,506
 
$3,394,514
               
               
               
NET INCOME PER COMMON SHARE:
             
Basic
$0.15
 
$0.03
 
$0.47
 
$0.33
Diluted
$0.15
 
$0.03
 
$0.47
 
$0.33
               
Weighted Average Number of Shares Outstanding:
             
  Basic
10,176,744
 
10,156,790
 
10,163,490
 
10,156,559
  Diluted
10,221,512
 
10,177,466
 
10,205,348
 
10,179,569















The accompanying notes are an integral part of these financial statements.
 

Tandy Leather Factory, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three and Nine Months Ended September 30, 2013 and 2012



 
THREE MONTHS
 
NINE MONTHS
 
2013
 
2012
 
2013
 
2012
NET INCOME
$1,561,832
 
$280,770
 
$4,777,506
 
$3,394,514
               
Foreign currency translation adjustments
272,799
 
174,633
 
(88,694)
 
74,266
               
COMPREHENSIVE INCOME
$1,834,631
 
$455,403
 
$4,688,812
 
$3,468,780








 




The accompanying notes are an integral part of these financial statements.


Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, 2013 and 2012

 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
     
 
Net income
$4,777,506
 
$3,394,514
 
Adjustments to reconcile net income to net cash provided by (used in)  operating activities:
     
   
Depreciation and amortization
     889,395
 
     794,122
   
Loss on disposal or abandonment of assets
       89,531
 
       16,977
   
Non-cash stock-based compensation
       11,686
 
       10,000
   
Deferred income taxes
     190,144
 
     (180,237)
   
Other
     (70,330)
 
     63,559
   
Net changes in assets and liabilities, net of effect of business acquisitions:
     
     
Accounts receivable-trade, net
      (122,953)
 
  253,702
     
Inventory
(3,629,704)
 
(9,754,553)
     
Income taxes
   (119,811)
 
(1,183,816)
     
Prepaid expenses
(1,069,399)
 
1,624,011
     
Other current assets
    (276,072)
 
(1,765,227)
     
Accounts payable-trade
     686,823
 
     929,847
     
Accrued expenses and other liabilities
 (15,234)
 
 1,097,165
 
Total adjustments
 (3,435,924)
 
 (8,094,450)
 
                            Net cash provided by (used in) operating activities
     1,341,582
 
     (4,699,936)
       
CASH FLOWS FROM INVESTING ACTIVITIES:
     
 
Purchase of property and equipment
    (2,415,484)
 
    (1,294,050)
 
Proceeds from sale or maturities of certificates of deposit
     -
 
    423,893
 
Proceeds from sale of assets
       515
 
       1,150
 
Decrease (increase) in other assets
         (420)
 
         6,675
       
Net cash used in investing activities
      (2,415,389)
 
      (862,332)
       
CASH FLOWS FROM FINANCING ACTIVITIES:
     
 
Proceeds from notes payable and long-term debt
-
 
1,000,000
 
Payments on notes payable and long-term debt
    (455,625)
 
    (151,875)
 
Proceeds from issuance of common stock
113,800
 
5,440
 
Payment of cash dividend
-
 
(2,536,131)
       
Net cash used in financing activities
    (341,825)
 
    (1,682,566)
       
NET CHANGE IN CASH
     (1,415,632)
 
     (7,244,834)
       
CASH, beginning of period
  7,705,182
 
  10,765,591
       
CASH, end of period
  $6,289,550
 
  $3,520,757
       
       
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     
Interest paid during the period
$158,659
 
$176,251
Income tax paid during the period, net of (refunds)
$2,507,842
 
$3,524,962









The accompanying notes are an integral part of these financial statements.


Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders' Equity
(Unaudited)
For the Nine Months Ended September 30, 2013 and 2012

 
 
Number of Shares
 
 
Par Value
 
 
Paid-in Capital
 
 
Treasury Stock
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 
Total
 
BALANCE, December 31, 2011
10,156,422
 
$26,760
 
$5,736,543
 
$(2,894,068)
 
$31,181,936
 
$382,630
 
$34,433,801
 
                             
Shares issued – stock options exercised
2,000
 
5
 
5,435
 
-
 
-
 
-
 
5,440
 
Stock-based compensation
-
 
-
 
10,000
 
-
 
-
 
-
 
10,000
 
Cash dividend
-
 
-
 
-
 
-
 
(2,536,131)
 
-
 
(2,536,131)
 
Net  income
-
 
-
 
-
 
-
 
3,394,514
 
-
 
3,394,514
 
Translation adjustment
-
 
-
 
-
 
-
 
-
 
74,266
 
74,266
 
BALANCE, September 30, 2012
10,158,422
 
$26,765
 
$5,751,978
 
$(2,894,068)
 
$32,040,319
 
$456,896
 
$35,381,890
 
                             
                             
 
 
Number of Shares
 
 
Par Value
 
 
Paid-in Capital
 
 
Treasury Stock
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 
Total
 
BALANCE, December 31, 2012
10,162,442
 
$26,775
 
$5,767,508
 
$(2,894,068)
 
$34,241,875
 
$378,927
 
$37,521,017
 
                             
Shares issued – stock options exercised
36,291
 
87
 
113,713
 
-
 
-
 
-
 
113,800
 
Stock-based compensation
-
 
-
 
11,686
 
-
 
-
 
-
 
11,686
 
Net  income
-
 
-
 
-
 
-
 
4,777,506
 
-
 
4,777,506
 
Translation adjustment
-
 
-
 
-
 
-
 
-
 
(88,694)
 
(88,694)
 
BALANCE, September 30, 2013
10,198,733
 
$26,862
 
$5,892,907
 
$(2,894,068)
 
$39,019,381
 
$290,233
 
$42,335,315
 





 







The accompanying notes are an integral part of these financial statements.


TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
1.  BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management, the accompanying consolidated financial statements for Tandy Leather Factory, Inc. and its consolidated subsidiaries contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly its financial position as of September 30, 2013 and December 31, 2012, and its results of operations and cash flows for the three and/or nine-month periods ended September 30, 2013 and 2012.  Operating results for the three and nine-month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

Inventory .   Inventory is stated at the lower of cost or market and is accounted for on the “first in, first out” method.  Based on negotiations with vendors, title generally passes to us when merchandise is put on board.  Merchandise to which we have title but which we have not yet received is recorded as inventory in transit.  In addition, the value of inventory is periodically reduced for slow-moving or obsolete inventory based on management's review of items on hand compared to their estimated future demand.

The components of inventory consist of the following:

 
As of
 
September 30, 2013
 
December 31, 2012
Inventory on hand:
     
Finished goods held for sale
$27,213,820
 
$24,039,846
Raw materials and work in process
1,227,130
 
495,182
Inventory in transit
1,051,538
 
1,327,756
 
$29,492,488
 
$25,862,784

Goodwill and Other Intangibles .   Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is required to be evaluated for impairment on an annual basis, absent indicators of impairment during the interim.  Application of the goodwill impairment test requires exercise of judgment, including the estimation of future cash flows, determination of appropriate discount rates and other important assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

A two-step process is used to test for goodwill impairment.  The first phase screens for impairment, while the second phase (if necessary) measures the impairment.  We have elected to perform the annual analysis during the fourth calendar quarter of each year.  As of December 31, 2012, management determined that the present value of the discounted estimated future cash flows of the stores associated with the goodwill is sufficient to support their respective goodwill balances.  No indicators of impairment were identified during the first three quarters of 2013.  In accordance with recent guidance from the FASB, beginning in 2012, we are permitted to first assess qualitative factors in testing goodwill for impairment prior to performing a quantitative assessment.

A summary of changes in our goodwill for the periods ended September 30, 2013 and 2012 is as follows:

 
Leather Factory
Tandy Leather
Total
Balance, December 31, 2011
$603,603
$383,406
$987,009
Acquisitions and adjustments
-
-
-
Foreign exchange gain/loss
5,018
-
5,018
Impairments
-
-
-
Balance, September 30, 2012
$608,621
$383,406
$992,027
 
 
Leather Factory
 
Tandy Leather
 
Total
Balance, December 31, 2012
$607,319
$383,406
$990,725
Acquisitions and adjustments
-
-
-
Foreign exchange gain/loss
(4,572)
-
(4,572)
Impairments
-
-
-
Balance, September 30, 2013
$602,747
$383,406
$986,153

Other intangibles consist of the following:

 
As of September 30, 2013
 
As of December 31, 2012
 
Gross
Accumulated Amortization
  Net
 
Gross
Accumulated Amortization
Net
Trademarks, Copyrights
$544,369
$480,143
$64,226
 
$544,369
$456,836
$87,533
Non-Compete Agreements
182,170
131,753
50,417
 
183,216
125,216
58,000
 
$726,539
$611,896
$114,643
 
$727,585
$582,052
$145,533

We recorded amortization expense of $30,890 during the first nine months of 2013 compared to $33,378 during the same period of 2012.  All of our intangible assets are subject to amortization under U.S. GAAP.  Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years is as follows:

 
Wholesale Leathercraft
Retail Leathercraft
Total
2013
$732
$41,337
$42,069
2014
492
44,004
44,496
2015
-
39,302
39,302
2016
-
4,666
4,666
2017
-
-
-

Revenue Recognition .   Our sales generally occur via two methods:  (1) at the counter in our stores, and (2) shipment by common carrier.  Sales at the counter are recorded and title passes as transactions occur.  Otherwise, sales are recorded and title passes when the merchandise is shipped to the customer.  Our shipping terms are FOB shipping point.

We offer an unconditional satisfaction guarantee to our customers and accept all product returns.  Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.

Comprehensive Income and Accumulated Other Comprehensive Income.   Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-stockholder sources and includes all changes in equity during a period except those resulting from investments by and dividends to stockholders.  Our comprehensive income consists of our net income and foreign currency translation adjustments from our international operations.

Recent Accounting Pronouncements.  In February 2013, FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The objective of ASU No. 2013-02 is to improve reporting by requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in the statement of operations.  The amendments in ASU No. 2013-02 are required to be applied retrospectively and are effective for reporting periods beginning after December 15, 2012.  The adoption of the standard did not have any impact on our consolidated financial statements.

2.           NOTES PAYABLE AND LONG-TERM DEBT

On July 31, 2007, we entered into a Credit Agreement and Line of Credit Note with JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with a credit facility of up to $5.5 million to facilitate our purchase of real estate consisting of a 191,000 square foot building situated on 30 acres of land located at 1900 SE Loop 820 in Fort Worth, Texas.  Proceeds in the amount of $4,050,000 were used to fund the purchase of the property.  On April 30, 2008, the principal balance was rolled into a 10-year term note with a 20-year amortization that accrues interest at a rate of 7.10% per annum.
 
  At September 30, 2013 and December 31, 2012, the amount outstanding under the above agreements consisted of the following:

 
September 30,    2013
 
December 31, 2012
Credit Agreement with JPMorgan Chase Bank – collateralized by real estate; payable as follows:
     
Line of Credit Note dated July 31, 2007, converted to a 10-year term note on April 30, 2008; $16,875 monthly principal payments plus interest at 7.1% per annum; matures April 30, 2018
$  2,649,375
 
$3,105,000
 
2,649,375
 
3,105,000
Less - Current maturities
(202,500)
 
(202,500)
 
$2,446,875
 
$2,902,500

On July 12, 2012, we executed a Line of Credit Note with JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with a revolving credit facility of up to $4 million. The note was obtained for working capital purposes.  The revolver bears interest at LIBOR plus 2% (2.25% at September 30, 2013) and was to mature on June 30, 2013.  On June 25, 2013, we executed a Note Modification Agreement which extends the maturity date of the Line of Credit Note to June 30, 2014.  All other terms remain unchanged.  Interest is paid monthly.  The unused amount at September 30, 2013 was $4 million.

3.           STOCK-BASED COMPENSATION
 
We have one stock option plan which provides for annual stock option grants to non-employee directors with an exercise price equal to the fair market value of the shares at the date of grant.  Under this plan, 12,000 options were awarded to directors in each of the first nine months of 2013 and 2012.  These options vest and become exercisable six months from the option grant date.  We had two other stock option plans from 1995 which provided for stock option grants to officers, key employees and non-employee directors.  These plans expired in 2005.  The expiration of the plans has no effect on the options previously granted.  Options outstanding and exercisable were granted at a stock option price which was not less than the fair market value of our common stock as of closing on the date the option was granted and no option has a term in excess of ten years.  No share based compensation expense was recognized in each of the quarters ended September 30, 2013 and 2012.  Share based compensation expense of $11,686 and $10,000 was recognized for the nine month periods ended September 30, 2013 and 2012, respectively, as a component of operating expenses.
 
During the nine months ended September 30, 2013 and 2012, the stock option activity under our stock option plans was as follows:

 
Weighted Average Exercise Price
# of shares
Weighted Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value
Outstanding, January 1, 2012
$4.40
115,600
   
Granted
5.27
12,000
   
Cancelled
-
-
   
Exercised
2.72
(2,000)
   
Outstanding, September 30, 2012
$4.51
125,600
4.93
$213,256
Exercisable, September 30, 2012
$4.51
125,600
4.93
$213,256
         
Outstanding, January 1, 2013
$4.53
121,600
   
Granted
6.87
12,000
   
Cancelled
-
-
   
Exercised
4.23
(49,000)
   
Outstanding, September 30, 2013
$5.04
84,600
7.22
$104,656
Exercisable, September 30, 2013
$5.04
84,600
7.22
$104,656

Other information pertaining to option activity during the nine-month periods ended September 30, 2013 and 2012 are as follows:

 
September 30, 2013
September 30, 2012
Weighted average grant-date fair value of stock options granted
$0.97
$0.83
Total fair value of stock options vested
$11,686
$10,000
Total intrinsic value of stock options exercised
$113,790
$3,077

There was no unrecognized compensation cost as of September 30, 2013 and 2012.

We have a restricted stock plan that was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013.  The plan reserves up to 300,000 shares of our common stock for restricted stock awards to our executive officers, non-employee directors and other key employees.  Awards granted under the plan may be stock awards or performance awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years.  No awards have been made to date.

4.         EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
   
2013
 
2012
 
2013
 
2012
Numerator:
               
 
Net  income
$1,561,832
 
$280,770
 
$4,777,506
 
$3,394,514
 
Numerator for basic and diluted earnings per share
1,561,832
 
280,770
 
4,777,506
 
3,394,514
Denominator:
               
 
Weighted-average shares outstanding-basic
10,176,744
 
10,156,790
 
10,163,490
 
10,156,559
                 
Effect of dilutive securities:
               
 
Stock options
44,768
 
20,676
 
41,858
 
23,010
Dilutive potential common shares
 
44,768
 
20,676
 
41,858
 
23,010
 
Denominator for diluted earnings per share- weighted-average shares
10,221,512
 
10,177,466
 
10,205,348
 
10,179,569
                 
 
Basic earnings per share
$0.15
 
$0.03
 
$0.47
 
$0.33
 
Diluted earnings per share
$0.15
 
$0.03
 
$0.47
 
$0.33

The net effect of converting stock options to purchase 111,600 and 127,600 shares of common stock at exercise prices less than the average market prices has been included in the computations of diluted earnings per share for the quarter ended September 30, 2013 and 2012, respectively.

5.           CASH DIVIDEND
 
In February 2012, our Board of Directors authorized a $0.25 per share special one-time cash dividend that was paid to stockholders of record at the close of business on March 1, 2012. We released the funds used to pay for the special one-time cash dividend on March 29, 2012 and the dividend, totaling $2.5 million, was paid to stockholders on April 2, 2012. Our Board will determine future cash dividends after giving consideration to our then existing levels of profit and cash flow, capital requirements, current and forecasted liquidity, as well as financial and other business conditions existing at the time.

6.           COMMITMENTS AND CONTINGENCIES

Legal Proceedings.   On March 16, 2011, two former employees of ours filed a lawsuit, entitled Mark Barnes and Jerry Mercante on behalf of themselves and all other similarly situated v. Tandy Leather Company, Inc., Tandy Leather Factory, and Does 1-50, in the US District Court for the District of Nevada.  The lawsuit was subsequently amended on May 9, 2011 to add another former employee, Donna Cavota, as a third named plaintiff.  The suit alleges that we violated requirements of the Fair Labor Standards Act (FLSA) as well as various state wage laws.  Plaintiffs seek to represent themselves and all similarly situated U.S. current and former store managers of ours.   A Settlement Agreement was reached between the parties, and on September 24, 2012, the United States District Court, Northern District of Texas, Fort Worth Division (“Court”) issued an Order Preliminarily Approving the Settlement of all federal and state claims asserted by the plaintiffs in the litigation.  We continue to deny any violation of any statute, law, rule or regulation, any liability or wrongdoing, and the truth of any or all of the plaintiffs’ allegations. We agreed to enter into the Settlement Agreement to avoid further expense and inconvenience, end the disruption and burden of the litigation, avoid any other present or future litigation arising out of the facts that gave rise to the litigation, avoid the risk inherent in uncertain complex litigation, and to put to rest the controversy set forth in the plaintiff’s litigation.

The Settlement Agreement preliminarily approved by the Court required us to establish a fund designated as a Qualified Settlement Fund (Escrow Account) in the amount of $993,386 to fund (1) settlement payments to the plaintiffs, (2) settlement payments to the other members of the settlement class who join the case, (3) plaintiffs’ attorneys’ fees and expenses, and (4) and the claim administrator (Escrow Agent’s) fees and expenses.   The foregoing description is not complete and is qualified in its entirety by reference to the full text of the Settlement Agreement which was attached as Exhibit 10.1 to a Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 1, 2012.
 
The deadline established by the Court for any existing or former persons employed by us as store managers between November 23, 2008 and September 24, 2012 to join the lawsuit as a class member expired on May 24, 2013.  On June 28, 2013, the Court issued two orders: (1) an Order Approving Class and Collective Action Settlement and Dismissing Case with Prejudice, and (2) a Final Judgment, Approving Class and Collective Action Settlement and Dismissing Case with Prejudice.  Pursuant to the Court’s June 28, 2013 Orders, the claims administrator (Escrow Agent) is required to make payments to those existing and former store managers and the plaintiffs who joined the lawsuit by signing and returning Consent to Join Forms, which contained a release of us from the claims asserted in plaintiffs’ lawsuit. The settlement payments to the class members and the plaintiffs will be made from the Escrow Account pursuant to the formula set forth in the Settlement Agreement, as well as the payment of the plaintiffs’ attorney’s fees and the fees and expenses of the claims administrator (Escrow Agent).  The total payment from the Escrow Account, to include our required FICA payments based on the settlement payments, is expected to be $680,867 from the total Escrow Account of $993,385.  After all payments have been made from the Escrow Account, the claims administrator (Escrow Agent) will terminate the Escrow Account within 120 days from the date the settlement checks have been mailed, and the balance of the Escrow Account (approximately $312,000) is expected to be returned to us before year end 2013.
 
In connection with the settlement, we recorded a charge to operations of $993,386 during the quarter ended September 30, 2012 as this amount, as ordered by the Court, covered the full settlement of all claims of opt in claimants, class counsels’ attorneys’ fees, and class administration costs in accordance with the terms of the agreement. In the quarter ended June 30, 2013, we recorded a benefit of approximately $312,000, which is the expected remaining balance in the Escrow Account after all payments have been made.
 
We are periodically involved in various other litigation matters that arise in the ordinary course of our business and operations.  There are no such matters pending that we expect will have a material impact on our financial position and operating results.  Legal costs associated with the resolution of claims, lawsuits and other contingencies are expensed as incurred.

7.  SEGMENT INFORMATION

We identify our segments based on the activities of three distinct operations:

a.  
Wholesale Leathercraft, which consists of a chain of wholesale stores operating under the name, The Leather Factory , located in North America;

b.  
Retail Leathercraft, which consists of a chain of retail stores operating under the name, Tandy Leather Company , located in the North America; and

c.  
International Leathercraft , which sells to both wholesale and retail customers.  We have three stores operating in this segment:  one in Northampton, United Kingdom which opened in February 2008, one in Sydney, Australia which opened in October 2011, and one in Jerez, Spain, which opened in January 2012.  These stores carry the same products as our North American stores.
 
Our reportable operating segments have been determined as separately identifiable business units, and we measure segment earnings as operating earnings, defined as income before interest and income taxes.
 
 
Wholesale Leathercraft
Retail Leathercraft
Int’l Leathercraft
Total
For the quarter ended September 30, 2013
       
Net sales
$6,476,676
$11,128,646
$919,282
$18,524,604
Gross profit
4,358,097
6,752,739
590,107
11,700,943
Operating earnings
956,721
1,351,062
97,570
2,405,353
Interest expense
(51,021)
-
-
(51,021)
Other income (expense), net
33,372
-
(19,595)
13,777
Income before income taxes
939,072
1,351,062
77,975
2,368,109
         
     Depreciation and amortization
241,864
71,496
13,325
326,685
     Fixed asset additions
290,087
162,697
-
452,784
     Total assets
$40,445,814
$11,150,004
$2,589,503
$54,185,321
         
For the quarter ended September 30, 2012
       
Net sales
$6,242,602
$9,947,911
$810,215
$17,000,728
Gross profit
4,111,067
5,848,397
445,306
10,404,770
Operating earnings
(297,897)
987,704
(44,951)
644,856
Interest expense
(59,623)
-
-
(59,623)
Other income (expense), net
15,926
-
(18,713)
(2,787)
Income before income taxes
(341,594)
987,704
(63,664)
582,446
         
     Depreciation and amortization
205,991
50,650
13,428
270,069
     Fixed asset additions
779,676
107,234
3,529
890,439
     Total assets
$35,690,494
$10,719,659
$2,242,963
$48,653,116
 
 
 
Wholesale Leathercraft
Retail Leathercraft
Int’l Leathercraft
Total
For the nine months ended September 30, 2013
       
Net sales
$19,934,996
$33,930,587
$2,869,861
$56,735,444
Gross profit
13,171,368
20,584,324
1,796,201
35,551,893
Operating earnings
2,853,219
4,243,006
276,052
7,372,277
Interest expense
(158,659)
-
-
(158,659)
Other income (expense), net
108,077
26
30,697
138,800
Income before income taxes
2,802,637
4,243,032
306,749
7,352,418
         
     Depreciation and amortization
655,022
193,118
41,255
889,395
     Fixed asset additions
1,858,985
554,831
1,668
2,415,484
     Total assets
$40,445,814
$11,150,004
$2,589,503
$54,185,321
         
For the nine months ended September 30, 2012
       
Net sales
$19,678,009
$30,093,864
$2,310,188
$52,082,061
Gross profit
12,914,740
18,365,729
1,430,136
32,710,605
Operating earnings
2,038,267
3,655,932
(30,395)
5,663,804
Interest expense
(176,251)
-
-
(176,251)
Other income (expense), net
44,275
13
15,498
59,786
Income before income taxes
1,906,291
3,655,945
(14,897)
5,547,339
         
     Depreciation and amortization
613,608
140,566
39,948
794,122
     Fixed asset additions
913,900
303,525
76,625
1,294,050
     Total assets
$35,690,494
$10,719,659
$2,242,963
$48,653,116

Net sales for geographic areas were as follows for the three and nine months ended September 30, 2013 and 2012:

Three months ended September 30,
2013
2012
United States
$15,466,317
$14,221,642
Canada
1,889,696
1,761,960
All other countries
1,168,591
1,017,126
 
$18,524,604
$17,000,728
     
Nine months ended September 30,
2013
2012
United States
$47,404,281
$43,861,288
Canada
5,728,405
5,214,782
All other countries
3,602,758
3,005,991
 
$56,735,444
$52,082,061

Geographic sales information is based on the location of the customer.  No single foreign country, except for Canada, accounted for any material amount of our consolidated net sales for the three or nine-month periods ended September 30, 2013 and 2012.  We do not have any significant long-lived assets outside of the United States.

 
 
Item 2.                       Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Business

We are the world’s largest specialty retailer and wholesale distributor of leather and leathercraft related items.  We market our products to our growing list of customers through company-owned retail and wholesale stores.  We are a Delaware corporation, and our common stock trades on the NASDAQ Global Market under the symbol “TLF.”  We operate our business in three segments:   Wholesale Leathercraft , which operates wholesale stores in North America under the trade name, The Leather Factory, Retail Leathercraft , which operates retail stores in North America under the trade name, Tandy Leather Company, and International Leathercraft , which operates combination retail/wholesale stores outside of North America under the trade name, Tandy Leather Factory .  See Note 7 to the Consolidated Financial Statements for additional information concerning our segments, as well as our foreign operations.

Our Wholesale Leathercraft segment operates 29 company-owned wholesale stores in 19 states and three Canadian provinces.  These stores are engaged in the wholesale distribution of leather and related items, including leatherworking tools, buckles and belt adornments, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits, to retailers, manufacturers, and end users.  Our Wholesale Leathercraft segment also includes our National Account sales group, whose customers are only national craft chains.
 
 
Our Retail Leathercraft segment operates company-owned Tandy Leather Company retail stores in 37 states and six Canadian provinces.  Tandy Leather Company, one of the oldest and one of the best-known suppliers of leather and related supplies used in the leathercraft industry, has been a primary leathercraft resource for decades.  Tandy Leather Company’s products include quality tools, leather, accessories, kits and teaching materials.  In 2002, we began expanding Tandy Leather Company’s industry presence by opening retail stores.  As of August 1, 2013, we were operating 78 Tandy Leather Company retail stores located throughout the United States and Canada.

Our International Leathercraft segment operates 3 company-owned stores, all located outside of North America.  These stores operate as combination retail / wholesale stores and consist of one store in Northampton, United Kingdom, one store in Sydney, Australia, and one store in Jerez, Spain.  We expect to open additional stores outside of North America in the future, although specific locations and opening dates have not yet been determined.

Critical Accounting Policies

A description of our critical accounting policies appears in Item 7 “Management's Discussions and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Forward-Looking Statements

Certain statements contained in this report and other materials we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made or to be made by us, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements generally are accompanied by words such as “may,” “will,” “could,” “should,” “anticipate,” “believe,” “budgeted,” “expect,” “intend,” “plan,” “project,” “potential,” “estimate,” “continue,” or “future,” variations thereof or other similar statements. There are certain important risks that could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of the important risks, including those described below, could cause actual results to differ materially from those suggested by the forward-looking statements.  Please refer also to our Annual Report on Form 10-K for fiscal year ended December 31, 2012 for additional information concerning these and other uncertainties that could negatively impact the Company.

Ø  
Our business may be negatively impacted by general economic conditions and the continuing financial uncertainty around the world.

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also small businesses and other retailers.  Specialty retail, and retail in general, is heavily influenced by general economic cycles.  Purchases of non-essential products tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income declines.  During periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain our earnings from operations as a percentage of net sales.  The United States and global economies have suffered from economic uncertainty for the past several years.  Consumer spending in the United States appears to have stabilized recently, but could deteriorate in the future.  As a result, our operating results may be adversely and materially affected by downward trends or uncertainty in the United States or global economies.

Ø  
Our profitability may decline as a result of increasing pressure on margins.

Our industry is subject to significant pricing pressure caused by many factors, including fluctuations in the cost of the leather and metal products that we purchase and changes in consumer spending patterns and acceptance of our products.  These factors may prohibit us from passing cost increases on to customers which could cause our gross margin to decline.  If our product costs increase and our sale prices do not, our future operating results could be adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs.

Ø  
We may be unsuccessful in implementing our planned international expansion, which could impair the value of our brand, harm our business and negatively affect our results of operation.

We plan to grow our net sales and net earnings from our International segment by opening store in various international markets.  As we expand outside of North America, we may incur significant costs relating to starting up, maintaining and expanding foreign operations.  Costs may include, but are not limited to, obtaining locations for stores, hiring personnel, and travel expenses.  We may be unable to open and operate new stores successfully and our growth may be limited, unless we are able to identify desirable sites for store locations; negotiate acceptable lease terms; hire, train and retain competent store personnel; manage inventory effectively to meet the needs and demands of customers on a timely basis; manage foreign currency risk effectively; and achieve acceptable operating margins from the new stores.  We cannot be sure that we can successfully open new stores or that our new stores will be profitable.

As we continue to increase our international operations, we face the possibility of greater losses from a number of risks inherent in doing business in international markets and from a number of factors which are beyond our control, such as political instability or acts of terrorism, which disrupt trade with the countries in which our suppliers or customers are located; local business practices that do not conform to legal or ethical guidelines; restrictions or regulations relating to imports or exports; additional or increased customs duties, tariffs, taxes and other charges on imports; significant fluctuations in the value of the dollar against foreign currencies; social, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell our products in these markets; and restrictions on the transfer of funds between the United States and foreign jurisdictions.

We assume no obligation to update or otherwise revise our forward-looking statements even if experience or future changes make it clear that any projected results, express or implied, will not be realized .

Results of Operations

Three Months Ended September 30, 2013 and 2012

The following tables present selected financial data of each of our three segments for the quarters ended September 30, 2013 and 2012.

 
Quarter Ended September 30, 2013
 
Quarter Ended September 30, 2012
 
Sales
 
Operating Income
 
Sales
 
Operating Income
Wholesale Leathercraft
$6,476,676
 
$956,721
 
$6,242,602
 
$(297,897)
Retail Leathercraft
11,128,646
 
1,351,062
 
9,947,911
 
987,704
Int’l Leathercraft
919,282
 
97,570
 
810,215
 
(44,951)
Total Operations
$18,524,604
 
$2,405,353
 
$17,000,728
 
$644,856

Consolidated net sales for the quarter ended September 30, 2013 increased $1.5 million, or 9%, compared to the same period in 2012.  All three segments contributed to the sales increase with gains ranging from 4% to 13%. Operating income on a consolidated basis for the quarter ended September 30, 2013 increased 273%, or $1.8 million, compared to the third quarter of 2012.  The primary reason for the significant increase in operating income was the one-time charge of $994,000 related to the settlement of litigation that was recorded in the third quarter of 2012, but was not repeated in the third quarter of 2013.  (See Note 6 to the consolidated financial statements included in Item 1 of this Report for additional information.)

The following table shows in comparative form our consolidated net income for the third quarters of 2013 and 2012:
 
 
2013
 
2012
% change
Net income
$1,561,832
 
$280,770
456%

All segments contributed to our increased consolidated net income.   Additional information appears below for each segment.

Wholesale Leathercraft

Our Wholesale Leathercraft segment consists of 29 wholesale stores and our National Account sales group.  The National Account sales group’s customers consist of only national craft chains.  The following table presents the combined sales mix by customer categories for the quarters ended September 30, 2013 and 2012:

 
Quarter Ended
Customer Group
09/30/13
 
09/30/12
  RETAIL (end users, consumers, individuals)
38%
 
33%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
5%
 
6%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
43%
 
44%
  MANUFACTURERS
7%
 
8%
  NATIONAL ACCOUNTS
7%
 
9%
 
100%
 
100%

Net sales increased 3.8%, or $234,000, for the third quarter of 2013 as follows:

 
#
Stores
Qtr Ended
09/30/13
 
Qtr Ended
09/30/12
 
$
Change
%
Change
Same store sales
29
$6,105,137
 
$5,821,208
 
$283,929
4.9%
National account group
 
371,539
 
421,394
 
(49,855)
(11.8)%
Total sales
 
$6,476,676
 
$6,242,602
 
$234,074
3.8%
 

Our same store sales increased 4.9% in the third quarter of 2013, as compared with the same period in 2012.  Compared to the third quarter of 2012, we achieved sales dollar increases in our retail and wholesale customer categories, which were offset somewhat by minimal decreases in our institution, manufacturing, and national account customer categories.  We continue to see strength from our retail customer group, while our other customer groups appear to be less stable.  Sales to summer camps and youth programs, as well as inmates and prisons, which are all included in our institution customer group, declined compared to last year’s third quarter due to a reduction in funding of programs.  Sales to our National Account customers were down 12% for the quarter, compared to the same quarter last year.  As discussed in our previous filings, we expect sales to our National Accounts customers to continue to decline year over year due to our decision to stop supplying certain products with unacceptable gross profit margins that these customers were previously buying.  Therefore, it is likely we will experience further sales declines to our National Account group if the products we stock are not what these customers want to purchase.   Our primary focus is on sales through our stores, rather than National Accounts, as we believe our stores represent the greatest potential for continued and consistent sales growth.

Operating income for Wholesale Leathercraft during the quarter ended September 30, 2013 increased $1.2 million, or 421%, from the comparative 2012 quarter.  Our gross profit margin increased from 65.9% to 67.3% as our sales to retail customers increased.  Those sales bring higher margins than sales to wholesale customers.  Operating expenses as a percentage of sales were 53%, down $1.0 million from the third quarter of 2012.  The primary reason for the operating expense decrease was the one-time charge of $994,000 related to the settlement of litigation that was recorded in the third quarter of 2012, but was not repeated in the third quarter of 2013.  (See Note 6 to the consolidated financial statements included in Item 1 of this Report for additional information.)  Significant expense increases occurred in employee compensation ($274,000), legal and professional fees ($178,000), which were offset by decreases in bad debts ($87,000), dues and subscriptions ($23,000), health insurance costs ($116,000), rents ($49,000), and supplies ($65,000).  The increase in employee compensation is due to an increase in employee count that is attributable to an increase in the size of certain stores.  The increase in legal fees is attributable to one time fees incurred for new trademark filings.

Retail Leathercraft

Our Retail Leathercraft segment consists of 78 and 77 Tandy Leather Company retail stores at September 30, 2013 and 2012, respectively.  Net sales increased 12% for the third quarter of 2013 over the same quarter last year.  A store is categorized as “new” until it is operating for the full comparable period in the prior year.

 
#
Stores
Qtr Ended
09/30/13
 
Qtr Ended
09/30/12
 
$
Change
%
Change
Same store sales
77
$11,004,898
 
$9,947,911
 
$1,056,987
10.6%
New store sales
1
123,748
 
-
 
123,748
N/A
Total sales
 
$11,128,646
 
$9,947,911
 
$1,180,735
11.9%

The following table presents sales mix by customer categories for the quarters ended September 30, 2013 and 2012 for our Retail Leathercraft operation:

 
Quarter Ended
Customer Group
09/30/13
 
09/30/12
  RETAIL (end users, consumers, individuals)
57%
 
60%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
4%
 
5%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
36%
 
33%
  NATIONAL ACCOUNTS
-
 
-
  MANUFACTURERS
3%
 
2%
 
100%
 
100%

The retail stores averaged approximately $48,000 in sales per store per month for the third quarter of 2013.
 
Sales to each customer group increased solidly over the third quarter of 2012, with the exception of our institution customer group.  Sales to summer camps and youth programs, which are part of our institution customer group, declined compared to last year’s third quarter due to a decrease in participation and funding of these programs.  Our gross profit margin increased from 58.8% to 60.7% due to the strength in sales to our retail customers.  Sales to our retail customer group bring higher margins compared to our other customer groups as our retail selling prices are higher than our other selling prices.  Operating income increased $363,000, or 37%, from the comparative 2012 quarter.  Operating income as a percentage of sales improved from 9.9% in the third quarter of 2012 to 12.1% in the third quarter of 2013 due to the increase in gross profit margin, partially offset by the increase in operating expenses.  Operating expenses as a percentage of sales decreased from 48.9% to 48.5% as expenses grew at a slightly slower rate than that of sales during the quarter.  Operating expenses increased $541,000 over the third quarter of 2012.  Compared to last year’s third quarter, manager bonuses increased $160,000 due to an increase in store profit.  Advertising and marketing expenses increased $87,000, due to special advertising related to store relocations, credit card fees and freight out (shipping to customers) increased $62,000 as a result of the increase in sales, rent and utilities expense increased $43,000 as we continue to move stores into larger locations, and supplies expense was up $12,000.

International Leathercraft

International Leathercraft consists of all stores located outside of North America.  As of September 30, 2013 and 2012, the segment contained three stores, with one each located in United Kingdom, Australia, and Spain. Net sales increased 13.5% for the third quarter of 2013 over the same quarter last year.  A store is categorized as “new” until it is operating for the full comparable period in the prior year.

 
#
Stores
Qtr Ended
09/30/13
 
Qtr Ended
09/30/12
 
$
Change
%
Change
Same store sales
3
$919,282
 
$810,215
 
$109,067
13.5%
New store sales
-
-
 
-
 
-
N/A
Total sales
 
$919,282
 
$810,215
 
$109,067
13.5%

Gross profit margin as a percentage of sales increased from 55.0% in the third quarter of 2012 to 64.2% in the third quarter of 2013.  We determine selling prices taking into consideration the currency conversion between the U.S. dollar and the local currency, as well as local market conditions.  Further, the mix of products sold has a direct impact on gross margins.  A larger ratio of non-leather items sold to leather sold will raise margins as non-leather items bring higher margins.  Similarly, a larger ratio of leather sold to non-leather items sold will lower margins as leather brings lower margins.  Operating expenses totaled $492,000 in the third quarter of 2013, up $2,000 from $490,000 in the third quarter of 2012.  Compared to last year’s third quarter, advertising and marketing expenses were up $27,000 and employee compensation was down $15,000. Advertising and marketing expenses were this segment’s largest expense in the quarter, followed by employee compensation, freight out, legal and professional fees, and rent.

Other Expenses

We paid $51,000 in interest expense in the third quarter of 2013 on our bank debt, which is related to our building purchase, compared to $59,000 in interest expense in the third quarter last year.  We recorded other income, consisting of gas royalties and miscellaneous non-operating income, of $33,000 in the current quarter compared to $17,000 in last year’s comparable quarter.  We recorded an expense of $20,000 during the third quarter of 2013 related to currency fluctuations from our international operations.  Comparatively, in the third quarter of 2012, we recorded an expense of $18,000 for currency fluctuations.

Nine Months Ended September 30, 2013 and 2012

The following table presents selected financial data of each of our three segments for the nine months ended September 30, 2013 and 2012:

 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
 
Sales
 
Operating
Income
 
 
Sales
 
Operating
Income
Wholesale Leathercraft
$19,934,996
 
$2,853,219
 
$19,678,009
 
$2,038,267
Retail Leathercraft
33,930,587
 
4,243,006
 
30,093,864
 
3,655,932
International Leathercraft
2,869,861
 
276,052
 
2,310,188
 
(30,395)
Total Operations
$56,735,444
 
$7,372,277
 
$52,082,061
 
$5,663,804

Consolidated net sales for the nine months ended September 30, 2013 were up 9% compared to the same period in 2012, increasing $4.7 million.  All three reporting segments contributed to the sales increase.  Retail Leathercraft contributed the largest sales increase of $3.8 million, followed by International Leathercraft reporting an increase of $560,000 and Wholesale Leathercraft reporting an increase of $257,000.  The increase in inventory at the stores, coupled with targeted advertising efforts, contributed to the sales increase.  Operating income on a consolidated basis for the nine months ended September 30, 2013 increased 30%, or $1.7 million, compared to the first three quarters of 2012.
 
The following table shows in comparative form our consolidated net income for the first three quarters of 2013 and 2012:

 
2013
 
2012
% change
Net income
$4,777,506
 
$3,394,514
40.7%
 
Wholesale Leathercraft

Net sales increased 1.3%, or $257,000, for the first nine months of 2013 as follows:

 
#
Stores
Nine Months Ended
09/30/13
 
Nine Months Ended
09/30/12
 
$
Change
%
Change
Same store sales
29
$18,897,124
 
$18,232,337
 
$664,787
3.7%
National account group
 
1,037,872
 
1,445,672
 
(407,800)
(28.2)%
Total sales
 
$19,934,996
 
$19,678,009
 
$256,987
1.3%

The following table presents the combined sales mix by customer categories for the nine months ended September 30, 2013 and 2012:

 
Nine Months Ended
Customer Group
09/30/13
 
09/30/12
  RETAIL (end users, consumers, individuals)
38%
 
34%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
4%
 
5%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
44%
 
43%
  MANUFACTURERS
7%
 
8%
  NATIONAL ACCOUNTS
7%
 
10%
 
100%
 
100%

Operating income for Wholesale Leathercraft for the first nine months of 2013 increased by $815,000 from the comparative 2012 period, a 40% improvement.  Compared to the first nine months of 2012, operating expenses decreased $558,000 for the first nine months of 2013, decreasing as a percentage of sales from 55.3% to 51.8%. The primary reason for the operating expense decrease was the one-time charge of $994,000 related to the settlement of litigation that was recorded in the third quarter of 2012, but was not repeated in the third quarter of 2013.  (See Note 6 to the consolidated financial statements included in Item 1 of this Report for additional information.)

Retail Leathercraft
Net sales were up 12.8% for the first nine months of 2013 over the same period last year.

 
 
# Stores
Nine Months Ended
09/30/13
 
Nine Months Ended
09/30/12
 
$
Change
%
Change
Same store sales
77
$33,563,875
 
$30,093,864
 
$3,470,011
11.5%
New store sales
1
366,712
 
-
 
366,712
N/A
Total sales
 
$33,930,587
 
$30,093,864
 
$3,836,723
12.8%

The following table presents sales mix by customer categories for the nine months ended September 30, 2013 and 2012 for our Retail Leathercraft operation:
 
 
Nine Months Ended
Customer Group
09/30/13
 
09/30/12
  RETAIL (end users, consumers, individuals)
57%
 
59%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
4%
 
5%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
36%
 
33%
  NATIONAL ACCOUNTS
-
 
-
  MANUFACTURERS
3%
 
3%
 
100%
 
100%

The retail stores averaged approximately $48,000 in sales per store per month for the first three quarters of 2013.

Operating income for the first nine months of 2013 increased $587,000, or 16%, from the comparative 2012, and increased slightly as a percentage of sales from 12.2% in the first nine months of 2012 to 12.5% in the first nine months of 2013 due to sales growing faster than expenses.  Gross margin decreased slightly from 61.0% to 60.7% due to the customer mix.  The ratio of retail sales, which brings a higher margin, to non-retail sales, which brings a lower margin, can effect gross profit margin positively or negatively.  During the first nine months of 2013, non-retail sales increased faster than retail sales, resulting in a slight decline in gross profit margin.  Operating expenses as a percentage of sales were 48.2% for the first nine months of 2013, a slight improvement over 48.9% for the first nine months of 2012.

International Leathercraft

International Leathercraft consists of all stores located outside of North America.  As of September 30, 2013 and 2012, the segment contained three stores with one each located in United Kingdom, Australia, and Spain. Net sales increased 24.2% for the first three quarters of 2013 over the same period last year.  A store is categorized as “new” until it is operating for the full comparable period in the prior year.

 
#
Stores
Nine Months Ended
09/30/13
 
Nine Months Ended
09/30/12
 
$
Change
%
Change
Same store sales
3
$2,869,861
 
$2,310,188
 
$559,673
24.2%
New store sales
-
-
 
-
 
-
-
Total sales
 
$2,869,861
 
$2,310,188
 
$559,673
24.2%

Gross profit margin as a percentage of sales increased from 61.9% in the first nine months of 2012 to 62.6% in the first nine months of 2013.  Selling prices are determined based on the currency conversion between the U.S. dollar and the local currency.  In addition, gross profit margin is affected by sales mix – the ratio of higher margin products (tools, supplies, etc.) to lower margin products (leather).  Operating expenses totaled $1.5 million in the first nine months of 2013, up $60,000 from $1.4 million in the first nine months of 2012.  Freight out (shipping to customers) increased $51,000 compared to the comparable period last year, while legal and professional fees increased $27,000.  Employee compensation is this segment’s largest expense, followed by advertising and marketing expenses, shipping costs to customers, and rent.

Other Expenses

We paid $159,000 in interest on our bank debt in the first nine months of 2013, compared to $176,000 in the first nine months of 2012.  We recorded $2,300 in interest income in the nine months ended September 30, 2013 compared to $6,800 in last year’s comparable period.  We recorded income of $31,000 for currency fluctuations in the first three quarters of 2013.  Comparatively, in the same period of 2012, we recorded income of $16,000 for currency fluctuations.

Capital Resources, Liquidity and Financial Condition

On our consolidated balance sheet, total assets were $54.2 million at September 30, 2013, up $5.1 million from $49.1 million at year-end 2012.  Total stockholders’ equity increased from $37.5 million at December 31, 2012 to $42.3 million at September 30, 2013, the increase being attributable to earnings in the first three quarters of this year. Our current ratio increased slightly from 4.5 at December 31, 2012 to 4.7 at September 30, 2013 as current assets grew faster than current liabilities.

Our investment in inventory increased by $3.6 million from year-end 2012 to September 30, 2013.  Inventory turnover reached an annualized rate of 2.7 times during the first nine months of 2013, slowing slightly from 2.8 times for the first nine months of 2012.  Inventory turnover was 3.2 times for all of 2012.  We compute our inventory turns as sales divided by average inventory.  As of September 30, 2013, our total inventory on hand was approximately 20% over our internal targets for optimal inventory levels.  We have increased the amount of inventory carried in our stores to provide our customers with greater product selection and to promote continued sales growth. Further, an increase in inventory during the third quarter is a normal occurrence as we anticipate fourth quarter demand.

Trade accounts receivable were $945,000 at September 30, 2013, up $123,000 from $823,000 at year-end 2012.  The average days to collect accounts for the first nine months of 2013 were 39 days, improving from 47 days for the first nine months of 2012.  We monitor our customer accounts very closely in order to minimize the risk of uncollectible accounts.

Accounts payable increased to $2.3 million at September 30, 2013 compared to $1.6 million at year-end 2012, primarily due to the increase in inventory purchases during the third quarter of 2013 compared to the fourth quarter of 2012.  Accrued expenses decreased $15,000 from December 31, 2012 to September 30, 2013.

During the first nine months of 2013, cash flow provided by operating activities was $1.3 million. Net income of $4.8 million, offset by the increase in inventory of $3.6 million accounted for the operating cash provided.  By comparison, during the first nine months of 2012, cash flow used by operating activities was $4.7 million.  The increase in inventory of $9.8 million, offset by net income of $3.4 million, and the increase in accrued liabilities of $1.1 million accounted for the majority of the operating cash used in the nine months ended September 30, 2012.

Cash flow used in investing activities totaled $2.4 million in the first nine months of 2013, consisting primarily of the building constructed to house our flagship store, which opened in June 2013, and purchases of store fixtures and computer equipment.  In the first three quarters of 2012, cash flow used in investing activities totaled $862,000 in the first nine months of 2012, consisting primarily of purchases of store fixtures and computer equipment and building construction in progress, partially offset by maturities of certificates of deposit.

Cash flow used in financing activities totaled $342,000 in the first nine months of 2013, consisting of bank debt repayments totaling $456,000, partially offset by the proceeds received from the exercise of stock options of $114,000. In the first nine months of 2012, cash flow used in financing activities totaled $1.7 million in the first nine months of 2012, consisting of a special one-time cash dividend of $2.5 million, partially offset by borrowings against the line of credit of $1 million less debt repayments of $152,000.

We expect to fund our operating and liquidity needs as well as our store growth from a combination of current cash balances, internally generated funds, and our revolving credit facility with JPMorgan Chase Bank.       .

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

For disclosures about market risk affecting us, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for fiscal year ended December 31, 2012.  We believe that our exposure to market risks has not changed significantly since December 31, 2012.  We expect that our exposure to foreign currency exchange risk will increase as our international presence increases.

Item 4.  Controls and Procedures .

Evaluation of Disclosure Controls and Procedures

Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the last day of the fiscal period covered by this report, September 30, 2013. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, 2013, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings .

The information contained in Note 6 to the consolidated financial statements included in Item 1 of this Report is hereby incorporated into this Item 1 by reference.

Item 5.  Other Information .

On June 10, 2013, we filed a Current Report on Form 8-K with the Securities and Exchange Commission reporting the results of the votes conducted at our annual meeting of stockholders held on June 6, 2013.  Such Current Report on Form 8-K reported, among other things, the approval of the Tandy Leather Factory, Inc. 2013 Restricted Stock Plan by our stockholders at such annual meeting.  A copy of the Tandy Leather Factory, Inc. 2013 Restricted Stock Plan was not filed as an exhibit to such Current Report on Form 8-K.  Accordingly, a copy of the Tandy Leather Factory, Inc. 2013 Restricted Stock Plan is attached hereto as Exhibit 10.1.  The description of the Tandy Leather Factory, Inc. 2013 Restricted Stock Plan contained herein is qualified in its entirety by reference to the full text of the Tandy Leather Factory, Inc. 2013 Restricted Stock Plan attached hereto and incorporated by reference herein.

Item 6. Exhibits .

Exhibit
Number
 
 
Description
3.1
Certificate of Incorporation of The Leather Factory, Inc., and Certificate of Amendment to Certificate of Incorporation of The Leather Factory, Inc. filed as Exhibit 3.1 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005 and incorporated by reference herein.
 
3.2
Bylaws of The Leather Factory, Inc., filed as Exhibit 3.5 to the Current Report on Form 8-K (Commission File No. 001-12368) filed by Tandy Leather Factory, Inc. (f/k/a The Leather Factory, Inc.) with the Securities and Exchange Commission on July 14, 2004 and incorporated by reference herein.
 
3.3
Certificate of Designations of Series A Junior Participating Preferred Stock of Tandy Leather Factory, Inc. filed as Exhibit 3.1 to Tandy Leather Factory’s Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013.
 
4.1
Rights Agreement dated as of June 6, 2013 between Tandy Leather Factory, Inc. and Broadridge Corporate Issuer Solutions, Inc., as Rights Agent (including the form of Certificate of Designations of Series A Junior Preferred Stock attached thereto as Exhibit A, the form of Right Certificate attached thereto as Exhibit B and the Summary of Rights attached thereto as Exhibit C) filed as Exhibit 4.1 to Tandy Leather Factory, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013.
 
*10.1
Tandy Leather Factory, Inc. 2013 Restricted Stock Plan
 
*31.1
13a-14(a) or 15d-14(a) Certification by Jon Thompson, Chief Executive Officer and President.
 
*31.2
13a-14(a) or 15d-14(a) Certification by Shannon Greene, Chief Financial Officer and Treasurer.
 
*32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS^
XBRL Instance Document.
 
101.SCH^
XBRL Taxonomy Extension Schema Document.
 
101.CAL^
XBRL Taxonomy Extension Calculation Document.
 
101.DEF^
XBRL Taxonomy Extension Definition Document.
 
101.LAB^
XBRL Taxonomy Extension Labels Document.
 
101.PRE^
XBRL Taxonomy Extension Presentation Document.
 
____________
 
 
*Filed herewith.
 
 
^ XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
TANDY LEATHER FACTORY, INC.
 
(Registrant)
   
Date:  November 14, 2013
By:   /s/ Jon Thompson
 
Jon Thompson
 
Chief Executive Officer and President
   
Date:  November 14, 2013
By:   /s/ Shannon L. Greene
 
Shannon L. Greene
 
Chief Financial Officer and Treasurer (Chief Accounting Officer)


 
 
 
 

EXHIBIT 31.1
RULE 13a-14(a) CERTIFICATION
 
I, Jon Thompson , certify that:
 
1.  I have reviewed this quarterly report on Form 10-Q of Tandy Leather Factory, Inc.;
 
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date:  November 14, 2013
 
 
/s/ Jon Thompson
 
Jon Thompson
 
Chief Executive Officer and President
 
(principal executive officer)




EXHIBIT 31.2
RULE 13a-14(a) CERTIFICATION

I, Shannon L. Greene , certify that:
 
1.  I have reviewed this quarterly report on Form 10-Q of Tandy Leather Factory, Inc.;
 
2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.    The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date:  November 14, 2013
 
 
/s/ Shannon L. Greene
 
Shannon L. Greene
 
Treasurer and Chief Financial Officer
 
(principal accounting officer)




EXHIBIT 32.1


Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Tandy Leather Factory, Inc. (the “Company”) for the quarter ended September 30, 2013 as filed with the United States Securities and Exchange Commission on the date hereof (the "Report"), Jon Thompson, as Chief Executive Officer and President of the Company, and Shannon L. Greene, as Treasurer and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

i.  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
ii.  
The information contained in the Report fully presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

November 14, 2013
By: /s/ Jon Thompson
 
Jon Thompson
 
Chief Executive Officer and President
   
November 14, 2013
By: /s/ Shannon L. Greene
 
Shannon L. Greene
 
Chief Financial Officer and Treasurer



Exhibit 10.1

 
TANDY LEATHER FACTORY, INC.
2013 RESTRICTED STOCK PLAN
 
1.            Purpose .  This Tandy Leather Factory, Inc. 2013 Restricted Stock Plan (this “ Plan ”) is intended to provide incentives which will attract, retain, motivate and reward executive officers, non-employee directors and other key employees of Tandy Leather Factory, Inc., a Delaware corporation (the “ Company ”) or any of its Affiliates, by providing them opportunities to acquire shares of the common stock, $0.0024 par value per share (“ Common Stock ”), of the Company.  “ Affiliate ,” as used herein, shall mean any corporation or other entity owning, directly or indirectly, 50% or more of the outstanding stock of the Company, or in which the Company or any such corporation or other entity owns, directly or indirectly, 50% or more of the outstanding capital stock (determined by aggregate voting rights) or other voting interests. Furthermore, the Plan is intended to assist in further aligning the interests of the Company’s executive officers, non-employee directors and other key employees with those of its shareholders. The Plan has been adopted and approved by the Board of Directors (the “ Board ”) of the Company and shall become effective as of the Effective Date, as defined below.
 
2.            Administration .
 
a.            The Plan generally shall be administered by a committee (the “ Committee ”) which shall be the Compensation Committee of the Board or another committee appointed by the Board from among its members. Unless the Board determines otherwise, the Committee shall be comprised solely of not less than two members who each shall qualify as a (i) “Non-Employee Director” within the meaning of Rule 16b-3(b)(3) (or any successor rule) under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and (ii) an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “ Code ”), and the regulations thereunder. The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make such determinations and interpretations and to take such action in connection with the Plan and any Awards granted hereunder as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants, as defined below, and their legal representatives.
 
b.            No member of the Board, no member of the Committee and no agent of the Committee who is an employee of the Company shall be liable for any act or failure to act hereunder, except in circumstances involving his or her bad faith, gross negligence or willful misconduct, or for any act or failure to act hereunder by any other member or employee or by any agent to whom duties in connection with the administration of this Plan have been delegated. The Company shall indemnify members of the Board, members of the Committee and any agent of the Committee who is an employee of the Company against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person’s bad faith, gross negligence or willful misconduct.
 
c.            The Committee shall have the authority to grant Awards to the Participants. The Committee may delegate such of its powers and authority under the Plan as it deems appropriate to designated officers or employees of the Company. In addition, the independent members of the full Board may exercise any of the powers and authority of the Committee under the Plan. In the event of such delegation of authority or exercise of authority by the Board, references in the Plan to the Committee shall be deemed to refer, as appropriate, to the agent of the Committee or the Board. The selection of members of the Committee or any subcommittee thereof, and any delegation by the Committee to designated officers or employees, under this Section 2(c) shall comply with Section 16(b) of the Exchange Act, the performance-based provisions of Section 162(m) of the Code, and the regulations promulgated under each of such statutory provisions, or the respective successors to such statutory provisions or regulations, as in effect from time to time, except to the extent that the Board determines that such compliance is not necessary or desirable. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company or any of its Affiliates whose employees have benefited from the Plan, as determined by the Committee.
 
3.            Participants .  Participants shall consist of such partners, members, executive officers, non-employee directors and other key employees (individually, “ Participant ” and collectively, “ Participants ”) of the Company or any of its Affiliates as the Committee in its sole discretion determines to be significantly responsible for the success and future growth and profitability of the Company and whom the Committee may designate from time to time to receive Awards under the Plan. Designation of a Participant in any year shall not require the Committee to designate such person to receive an Award in any other year or, once designated, to receive the same type or amount of Award as granted to the Participant in any other year. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of Awards.
 
4.            Types of Awards and Vesting Restrictions .  Stock Awards and Performance Awards may, as determined by the Committee, in its discretion, constitute Performance-Based Awards, as described in Section 8 below. Awards granted to Participants under the Plan may be subject to a graded vesting schedule with a minimum vesting period of four years, unless otherwise determined by the Committee. Awards shall be evidenced by Award agreements (which need not be identical) in the form attached hereto as Exhibit A or in such other form as the Committee may from time to time approve; provided , however , that in the event of any conflict between the provisions of the Plan and any such agreements, the provisions of the Plan shall prevail.
 
5.            Common Stock Available Under the Plan .
 
a.             Shares Available . The aggregate number of shares of Common Stock that may be subject to Awards granted under this Plan shall be 300,000 shares of Common Stock, which may be authorized and unissued or treasury shares, subject to any adjustments made in accordance with Section 9 below.
 
b.             Shares Underlying Awards That Again Become Available . The following shares of Common Stock shall again become available for Awards: (1) any shares of Common Stock subject to an Award that are forfeited to the Company under Section 11(b) or 11(c) of this Plan or under the provisions of the applicable Award agreement; (2) any shares of Common Stock subject to an Award that are retained by the Company as payment of the tax withholding obligations with respect to an Award; and (3) a number of shares of Common Stock equal to the number of previously owned shares of Common Stock surrendered to the Company to satisfy tax withholding obligations with respect to an Award.
 
6.            Stock Awards .  The Committee is authorized to grant Stock Awards and shall, in its sole discretion, determine such Participants in the Plan who will receive Stock Awards and the number of shares of Common Stock underlying each Stock Award. Each Stock Award shall be subject to such terms and conditions consistent with the Plan as shall be determined by the Committee and as set forth in the Award agreement, including, without limitation, restrictions on the sale or other disposition of such shares, and the right of the Company to reacquire such shares for no consideration upon termination of the Participant’s employment within specified periods. The Committee may require the Participant to deliver a duly signed stock power, endorsed in blank, relating to Common Stock covered by such Stock Award and/or that the stock certificates evidencing such shares be held in custody or bear restrictive legends until the restrictions thereon shall have lapsed. The Award agreement shall specify whether the Participant shall have, with respect to the shares of Common Stock subject to a Stock Award, all of the rights of a holder of shares of Common Stock, including the right to receive dividends and to vote the shares.
7.            Performance Awards .
                           a.             In General .  The Committee is authorized to grant Performance Awards and shall, in its sole discretion, determine such Participants who will receive Performance Awards and the number of shares of Common Stock that may be subject to each Performance Award. Each Performance Award shall be subject to such terms and conditions consistent with the Plan as shall be determined by the Committee and as set forth in the Award agreement. The Committee shall set performance targets at its discretion which, depending on the extent to which they are met, will determine the number of Performance Awards that will be paid out to the Participants, and may attach to such Performance Awards one or more restrictions. Performance targets may be based upon, without limitation, Company-wide, divisional and/or individual performance.

b.             Adjustment of Performance Targets .  With respect to those Performance Awards that are not intended to qualify as Performance-Based Awards (as described below), the Committee shall have the authority at any time to make adjustments to performance targets for any outstanding Performance Awards which the Committee deems necessary or desirable unless at the time of establishment of goals the Committee shall have precluded its authority to make such adjustments.

c.             Payout . Payment of earned Performance Awards shall be made shares of Common Stock and shall be made in accordance with the terms and conditions prescribed or authorized by the Committee. The Committee, in its sole discretion, may permit a Participant to elect to defer the receipt of any Performance Award based upon a performance period of at least 12 months, provided that the Participant performed services continuously from a date no later than the date upon which the performance criteria are established through a date no earlier than the date upon which the Participant makes such deferral election. An election to defer the receipt of a Performance Award must be made no later than the date that is six months before the end of the performance period, provided that in no event may an election to defer a Performance Award be made after such Performance Award has become both substantially certain to be paid and readily ascertainable. Notwithstanding the foregoing to the contrary, a Participant shall not be permitted to elect to defer the receipt of a Performance Award unless such election complies with Code Section 409A and Treasury Regulations, Rulings and Notices of Internal Revenue Service (“ IRS ”) issued thereunder.
 
8.            Performance-Based Awards .
 
a.             In General .  Certain Stock Awards and Performance Awards granted under the Plan, and the compensation attributable to such Awards, are intended to (i) qualify as Performance-Based Awards (as defined in the next sentence) or (ii) be otherwise exempt from the deduction limitation imposed by Section 162(m) of the Code. Certain Awards granted under the Plan may be granted in a manner such that Awards qualify as “performance-based compensation” (as such term is used in Section 162(m) of the Code and the regulations thereunder) and thus be exempt from the deduction limitation imposed by Section 162(m) of the Code (“ Performance-Based Awards ”). Awards may only qualify as Performance-Based Awards if at the time of grant the Committee is comprised solely of two or more “outside directors” (as such term is used in Section 162(m) of the Code and the regulations thereunder).
 
b.             Other Performance-Based Awards . Stock Awards and Performance Awards granted under the Plan should qualify as Performance-Based Awards if, as determined by the Committee, in its discretion, either the granting or vesting of such Award is subject to the achievement of a performance target or targets based on one or more of the performance measures specified in Section 8(c) below. With respect to such Awards intended to qualify as Performance-Based Awards:

(1)           the Committee shall establish in writing (x) the objective performance-based goals applicable to a given period and (y) the individual employees or class of employees to which such performance-based goals apply no later than 90 days after the commencement of such period (but in no event after 25 percent of such period has elapsed);

(2)           no Performance-Based Awards shall be payable to or vest with respect to, as the case may be, any Participant for a given period until the Committee certifies in writing that the objective performance goals (and any other material terms) applicable to such period have been satisfied; and

(3)           after the establishment of a performance goal, the Committee shall not revise such performance goal or increase the amount of compensation payable thereunder (as determined in accordance with Section 162(m) of the Code) upon the attainment of such performance goal.

c.             Performance Measures .  The Committee may use the following performance measures (either individually or in any combination) to set performance targets with respect to Awards intended to qualify as Performance-Based Awards: net sales; pretax income before allocation of corporate overhead and bonus; budget; earnings per share; net income; division, group or corporate financial goals; return on shareholders’ equity; return on assets; return on net assets; return on investment capital; gross margin return on investment; gross margin dollars or percent; sales per square foot or per hour; payroll as a percentage of sales; inventory shrink; comparable store sales; inventory turnover; employee turnover; sales, general and administrative expense; attainment of strategic and operational initiatives; appreciation in and/or maintenance of the price of Common Stock or any other publicly-traded securities of the Company, if any; market share; gross profits; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; economic value-added models; comparisons with various stock market indices; and/or reductions in costs. The foregoing criteria shall have any reasonable definitions that the Committee may specify, which may include or exclude any or all of the following items as the Committee may specify: extraordinary, unusual or non-recurring items; effects of accounting changes; effects of financing activities; expenses for restructuring or productivity initiatives; other non-operating items; spending for acquisitions; effects of divestitures; and effects of litigation activities and settlements. Any such performance criterion or combination of such criteria may apply to the Participant’s Award opportunity in its entirety or to any designated portion or portions of the Award opportunity, as the Committee may specify.
 
9.            Adjustment Provisions .  If there shall be any change in Common Stock of the Company, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or distribution (other than normal cash dividends) to shareholders of the Company, in order to prevent dilution or enlargement of Participants’ rights under the Plan, the Committee shall have the authority to adjust, in an equitable manner, the number and kind of shares that may be issued under the Plan, the number and kind of shares subject to outstanding Awards, and the Fair Market Value of Common Stock and other value determinations applicable to outstanding Awards. Appropriate adjustments may also be made by the Committee in the terms of any Awards under the Plan to reflect such changes or distributions and to modify any other terms of outstanding Awards on an equitable basis, including modifications of performance targets and changes in the length of performance periods. In addition, other than with respect to Awards intended to constitute Performance-Based Awards, the Committee is authorized to make adjustments to the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company or any of its Affiliates or the financial statements of the Company, or in response to changes in applicable laws, regulations, or accounting principles.
 
10.            Change In Control .

a.             Accelerated Vesting . Notwithstanding any other provision of this Plan, unless otherwise provided in the applicable Award agreement, if there is a Change in Control of the Company (as defined below), all unvested Awards granted under the Plan shall become fully vested immediately upon the occurrence of the Change in Control and such vested Awards shall be paid out or settled, as applicable, within 60 days upon the occurrence of the Change in Control, subject to requirements of applicable laws and regulations. The Committee shall have full discretion, notwithstanding anything herein or in an Award agreement to the contrary, with respect to an outstanding Award, upon the merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company, to provide that the securities of another entity may be substituted hereunder for the shares of Common Stock and to make equitable adjustment with respect thereto.

b.             Definition . For purposes of this Section 10 , (i) if there is an employment agreement or at will offer letter between the Participant and the Company or any of its Affiliates in effect (for the avoidance of doubt, any Change of Control Agreement between the Participant and the Company shall not be considered an employment agreement or offer letter for the purposes of this Plan), “ Change in Control ” shall have the same definition as the definition of “Change in Control” contained in such employment agreement or at will offer letter ; or (ii) if “Change in Control” is not defined in such employment agreement or at-will offer letter or if there is no employment agreement or at will offer letter between the Participant and the Company or any of its Affiliates in effect, “ Change in Control ” of the Company shall be deemed to have occurred upon any of the following events:

(1)           The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)) (a “ Person ”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (i) the then-outstanding shares of Common Stock (the “ Outstanding Company Common Stock ”) or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “ Outstanding Company Voting Securities ”); provided , however , that for purposes of this subsection (1), the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 10(b) ; or

(2)           Individuals who, as of the Effective Date, constitute the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of the Board; provided , however , that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(3)           Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “ Business Combination ”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(4)           Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
 
11.            Termination of Employment .
 
a.             Death or Disability .  Subject to any written agreement between the Participant and the Company or any of its Affiliates, if a Participant’s employment is terminated due to death or Disability (as defined below):
 
(1)           all unvested Stock Awards held by the Participant on the date of the Participant’s termination of employment due to death or the date of the termination of his or her employment related to Disability, as the case may be, shall immediately become vested as of such date; and
 
(2)           all unearned and/or unvested Performance Awards held by the Participant on the date of the Participant’s termination of employment due to death or the date of the termination of his or her employment related to Disability, as the case may be, shall treated as follows:
 
(A)           Unearned and/or unvested Performance Awards with performance periods of greater than one year for which the Participant has completed a minimum of at least one year into a performance period shall immediately become earned or vested as of such date and shall be paid out and/or settled based on the Company’s and/or Participant’s performance immediately prior to the date of the Participant’s termination of employment due to death or the date of the termination of his or her employment related to Disability on a pro-rated basis; and
 
(B)           All other unearned and/or unvested Performance Awards shall immediately be forfeited by such Participant as of such date.
 
b.             Other Termination .  Subject to any written agreement between the Participant and the Company or any of its Affiliates, if a Participant’s employment is terminated for any reason, including without limitation, retirement, other than due to death or Disability, all unearned or unvested Awards held by the Participant on the date of the termination of his or her employment shall immediately be forfeited by such Participant as of such date.
 
c.             Discretionary Accelerated Vesting .  Notwithstanding anything contained in the Plan to the contrary, the Committee may, in its discretion, provide that any or all unvested Stock Awards held by the Participant on the date of the Participant’s death and/or the date of the termination of the Participant’s employment shall immediately become vested as of such date.
 
d.             Disability Definition .  For the purposes of this Section 11 , (i) if there is an employment agreement or at will offer letter between the Participant and the Company or any of its Affiliates in effect (for the avoidance of doubt, any Change of Control Agreement between the Participant and the Company shall not be considered an employment agreement or offer letter for the purposes of this Plan), “ Disability ” shall have the same definition as the definition of “Disability” contained in such employment agreement or at will offer letter; or (ii) if “Disability” is not defined in such employment agreement or at will offer letter or if there is no employment agreement or at will offer letter between the Participant and the Company or any of its Affiliates in effect, “ Disability ” shall mean the following, as may be further modified or supplemented by the Committee in its sole discretion:  As a result of the Participant’s physical or mental illness, the Participant is absent from the Participant’s duties with the Company on a full-time basis for three consecutive months, and within 30 days after written Notice of Termination (as defined below) is given, the Participant does not return to the full-time performance of the Participant’s duties. For purposes of this Plan, a “ Notice of Termination ” shall mean a written notice from the Company which indicates that the Participant has been determined to have Disability within the definition of this Section 11(d) of this Plan and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such determination.

12.            Section 409A of the Code .
 
a.            Awards under the Plan are intended either to be exempt from the rules of Section 409A of the Code or to satisfy those rules and shall be construed accordingly. However, the Company shall not be liable to any Participant or other holder of an Award with respect to any Award-related adverse tax consequences arising under Section 409A or other provision of the Code.
 
b.            If any provision of the Plan or an Award agreement contravenes any regulations or Treasury guidance promulgated under Code Section 409A or could cause an Award to be subject to the interest and penalties under Code Section 409A, such provision of the Plan or Award shall be deemed automatically modified to maintain, to the maximum extent practicable, the original intent of the applicable provision without violating the provisions of Code Section 409A. Moreover, any discretionary authority that the Administrator may have pursuant to the Plan shall not be applicable to an Award that is subject to Code Section 409A to the extent such discretionary authority will contravene Section 409A or the regulations or guidance promulgated thereunder.
 
c.            Notwithstanding any provisions of this Plan or any Award granted hereunder to the contrary, no acceleration shall occur with respect to any Award to the extent such acceleration would cause the Plan or an Award granted hereunder to fail to comply with Code Section 409A.
 
d.            Notwithstanding any provisions of this Plan or any applicable Award agreement to the contrary, no payment shall be made with respect to any Award granted under this Plan to a “specified employee” (as such term is defined for purposes of Code Section 409A) prior to the six-month anniversary of the employee’s separation of service to the extent such six-month delay in payment is required to comply with Code Section 409A.
 
13.            Transferability .  Each Award granted under the Plan to a Participant shall not be transferable otherwise than by will or the laws of descent and distribution.  Notwithstanding the foregoing, at the discretion of the Committee, an Award may permit the transferability of such Award by a Participant solely to members of the Participant’s immediate family or trusts or family partnerships for the benefit of such persons, subject to any restriction included in the Award agreement.
 
14.            Other Provisions .  Awards granted under the Plan may also be subject to such other provisions (whether or not applicable to the Award granted to any other Participant) as the Committee determines on the date of grant to be appropriate, including without limitation, for the forfeiture of, or restrictions on resale or other disposition of, Common Stock acquired under any form of the Award, for the acceleration of vesting of Awards, or to comply with federal and state securities laws, or understandings or conditions as to the Participant’s employment, in addition to those specifically provided for under the Plan. The Committee shall have the authority to retract any Award granted under the Plan in case of a material restatement of the financial statements of the Company or if it is otherwise determined by the Committee that the previously granted Award was not earned by the Participant.
 
15.            Fair Market Value .  For purposes of this Plan and any Awards granted hereunder, “ Fair Market Value ” shall mean, as of any given date, the closing price of a share of Common Stock on The NASDAQ Stock Market LLC or such other public trading market on which shares of Common Stock are listed or quoted on that date. If there is no regular public trading market for shares of Common Stock, the Fair Market Value of a share of Common Stock shall be determined by the Committee in good faith. In each case, the Fair Market Value shall be determined without regard to whether shares of Common Stock are restricted or represent a minority interest.
 
16.            Withholding .  All payments or distributions of Awards made pursuant to the Plan shall be net of any amounts required to be withheld pursuant to applicable federal, state and local tax withholding requirements. If the Company proposes or is required to distribute Common Stock pursuant to the Plan, it may require the Participant receiving such Common Stock to remit to it or to the Affiliate that employs such Participant an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Stock. In lieu thereof, the Company or the Affiliate employing the Participant shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Company or the Affiliate, as the case may be, to the Participant receiving Common Stock, as the Committee shall prescribe. The Committee may, in its discretion, and subject to such rules as the Committee may adopt (including any as may be required to satisfy applicable tax and/or non-tax regulatory requirements), permit a Participant to pay all or a portion of the federal, state and local withholding taxes arising in connection with any Award consisting of shares of Common Stock by electing to have the Company withhold shares of Common Stock having a Fair Market Value equal to the amount of tax to be withheld, such tax calculated at rates required by statute or regulation.
 
17.            Tenure .  A Participant’s right, if any, to continue to serve the Company as an executive officer, non-employee director, other key employee, or otherwise shall not be enlarged or otherwise affected by his or her designation as a Participant under the Plan.
 
18.            Unfunded Plan .  Participants shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974, as amended.
 
19.            No Fractional Shares .  No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, or Awards, or other property shall be issued or paid in lieu of fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
 
20.            Duration, Amendment and Termination .  No Award shall be granted more than five years after the Effective Date; provided , however , that the terms and conditions applicable to any Award granted prior to such date may thereafter be amended or modified by mutual agreement between the Company and the Participant or such other persons as may then have an interest therein. The Board or the Committee may amend the Plan from time to time or suspend or terminate the Plan at any time. However, no action authorized by this Section 20 shall reduce the amount of any existing Award or change the terms and conditions thereof without the Participant’s consent, except as otherwise provided for in Section 9 . No amendment of the Plan shall, without approval of the shareholders of the Company, (i) increase the total number of shares which may be issued under the Plan; (ii) modify the requirements as to eligibility for Awards under the Plan; or (iii) otherwise materially amend the Plan as provided in NASDAQ Marketplace Rules or the rules of another public trading market on which shares of Common Stock are then listed or quoted.
 
21.            Governing Law .  THIS PLAN, AWARDS GRANTED HEREUNDER AND ACTIONS TAKEN IN CONNECTION HEREWITH SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE (REGARDLESS OF THE LAW THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE DELAWARE PRINCIPLES OF CONFLICT OF LAWS).
 
22.            Severability .  In case any provision of this Plan shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
 
23.            Effective Date; Termination .
 
a.            The Plan shall be effective as of the date on which the Plan is approved by the shareholders of the Company at an annual meeting or any special meeting of shareholders of the Company (the “ Effective Date ”) and such approval of shareholders shall be a condition to the right of each Participant to receive Awards hereunder.
 
b.            This Plan shall terminate on the 5th anniversary of the Effective Date (unless sooner terminated by the Board).

 
The foregoing 2013 Restricted Stock Plan was duly adopted and approved by the Board of Directors of the Company on ____________, 201__.

 
TANDY LEATHER FACTORY, INC.
 
 
By:                                                      
Name:                                                                
Title:                                                      
 
 
 
 
 

Exhibit A

RESTRICTED STOCK AGREEMENT

GRANTED TO:
DATE OF GRANT:
GRANTED PURSUANT TO:       Tandy Leather Factory, Inc. 2013 Restricted Stock Plan
NUMBER OF SHARES:
VESTING SCHEDULE:

1.             Restricted Stock Agreement .  This Restricted Stock Agreement (this “ Agreement ”) is made and entered into as of                      (the “ Date of Grant ”) between Tandy Leather Factory, Inc., a Delaware corporation (the “ Company ”), and                      , as a participant (the “ Participant ”) in the Tandy Leather Factory, Inc. 2013 Restricted Stock Plan (the “ Plan ”), a copy of which is enclosed herewith. Capitalized terms not defined herein shall have the meanings ascribed thereto in the Plan.

2.             Grant of Restricted Stock .  The Participant is granted ___ shares of Common Stock of the Company (the “ Restricted Stock ”). The Restricted Stock is granted as provided for under the Plan and is subject to the terms and conditions set forth in the Plan and this Agreement. The Restricted Stock granted hereunder is a matter of separate inducement and is not in lieu of salary or other compensation for the services of a Participant to the Company or any of its Affiliates.
 
3.             Vesting .  This grant of Restricted Stock shall vest in accordance with the following schedule:

[The Committee may provide for any vesting schedule it deems appropriate, from immediate vesting to any daily, monthly or yearly vesting up to 5 years and in combination with any or none of the performance measures permitted to be used under the Plan, either individually or in any combination and with or without acceleration.  It is currently anticipated, however, that the Committee will choose to grant awards of Restricted Stock with vesting as follows:

“Subject to the provisions of Section 8 of this Agreement, the Restricted Stock shall vest during the term of Participant’s employment in four equal annual installments of 25% of the shares of Restricted Stock covered by this Agreement, the first installment to be exercisable on the 12 month anniversary of the date of this Option (the “ Initial Vesting Date ”), with an additional 25% of such shares vesting on each of the three successive 12 month periods following the Initial Vesting Date.”]

4.             Restrictions Prior to Vesting .  The Restricted Stock granted hereunder shall be promptly issued and evidenced by a certificate or certificates for such shares issued in the Participant’s name or by book entry at the Company’s option. The Participant shall thereupon have all the rights of a shareholder with respect to such shares, including, but not limited to, the right to vote such shares and to receive all dividends and other distributions paid with respect to them; provided , however , that the shares shall be subject to the restrictions on transferability in Sections 6 and 7 below. Unless otherwise provided in this Section 4 , the Company shall hold the certificate or certificates for such shares until the date the restrictions on transferability are removed in accordance with Sections 6 and 8 below. The Company may, in its sole discretion and at any time prior to the date the restrictions on transferability are removed in accordance with Sections 6 and 8 below, require (i) that the stock certificate or certificates representing such shares shall be imprinted with a legend stating that the shares represented thereby are the restricted shares subject to the terms and conditions of this Agreement and, as such, may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except in accordance with the terms of this Agreement, and/or (ii) that the Participant shall, upon receipt of the certificate or certificates therefor, deposit such certificate or certificates together with a stock power or other like instrument of transfer, appropriately endorsed in blank, with an escrow agent designated by the Company, which may be the Company, under a deposit agreement containing such terms and conditions as the Company shall approve, with the expenses of such escrow to be borne by the Company.
 
5.             Adjustment Provisions .  If under Section 9 of the Plan the Participant, as the owner of the shares of the Restricted Stock, shall be entitled to new, additional or different shares of stock or securities, (i) the Company may require that the certificate or certificates for, or other evidences of, such new, additional or different shares or securities, together with a stock power or other instrument of transfer appropriately endorsed, shall be imprinted with a legend as provided in Section 4 above, be deposited by the Participant under the deposit agreement provided for therein, and (ii) such certificate or certificates for, or other evidences of, such new, additional or different shares or securities shall be subject to the restrictions on transferability as provided in Sections 6 and 7 below.
 
6.             Removal of Transfer Restrictions .  The shares of the Restricted Stock shall be subject to restrictions on transferability. Subject to Section 8 below, such restrictions shall be removed from such shares according to the vesting schedule set forth above. Notwithstanding anything contained in this Agreement to the contrary, if there is a Change in Control of the Company, all unvested shares of Restricted Stock granted under this Agreement shall become fully vested immediately upon the occurrence of the Change in Control and such vested shares of Restricted Stock shall be paid out or settled, as applicable, within 60 days upon the occurrence of the Change in Control, subject to requirements of applicable laws and regulations.

7.             No Transfer .  During the period when the Restricted Stock is subject to the restrictions on transferability, none of the shares of the Restricted Stock subject to such restrictions shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except by will or the laws of descent and distribution. Any attempt by the Participant to dispose of any shares of the Restricted Stock in any such manner shall result in the immediate forfeiture of such shares.
 
 
8.             Termination of Employment .

a.            Death or Disability .  If the Participant’s employment is terminated due to death or Disability all unvested shares of Restricted Stock held by the Participant on the date of the Participant’s termination of employment due to death or the date of the termination of his or her employment related to Disability, as the case may be, shall immediately become vested as of such date.
 
 
b.             Other Termination .  If a Participant’s employment is terminated for any reason, including, without limitation, retirement, other than due to death or Disability, all unvested shares of Restricted Stock held by the Participant on the date of the termination of his or her employment shall immediately be forfeited by such Participant as of such date.

c.             Discretionary Accelerated Vesting .  Notwithstanding anything contained in this Agreement to the contrary, the Committee may, in its discretion, provide that any or all unvested shares of Restricted Stock held by the Participant on the date of the Participant’s death and/or the date of the termination of the Participant’s employment shall immediately become vested as of such date.
 
 
9.             Tax Withholding .  All payments or distributions of an Award made pursuant to this Agreement shall be net of any amounts required to be withheld pursuant to applicable federal, state and local tax withholding requirements. If the Company proposes or is required to distribute Common Stock pursuant to this Agreement, it may require the Participant receiving such Common Stock to remit to it or to the Affiliate that employs such Participant an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Stock. In lieu thereof, the Company or the Affiliate employing the Participant shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Company or the Affiliate, as the case may be, to the Participant receiving Common Stock, as the Committee shall prescribe. The Committee may, in its discretion, and subject to such rules as the Committee may adopt (including any as may be required to satisfy applicable tax and/or non-tax regulatory requirements), permit a Participant to pay all or a portion of the federal, state and local withholding taxes arising in connection with this Award consisting of shares of Common Stock by electing to have the Company withhold shares of Common Stock having a Fair Market Value equal to the amount of tax to be withheld, such tax calculated at rates required by statute or regulation.

10.             Legend .  If the Company, in its sole discretion, shall determine that it is necessary, to comply with applicable securities laws, the certificate or certificates representing any shares of Common Stock delivered to the Participant under this Agreement shall bear an appropriate legend in form and substance, as determined by the Company, giving notice of applicable restrictions on transfer under or with respect to such laws. Unless and until the shares of Common Stock delivered to the Participant under this Agreement are registered under the Securities Act of 1933, as amended (the “ Securities Act ”), all certificates representing such shares and any certificates subsequently issued in substitution therefor and any certificate for any securities issued pursuant to any stock split, share reclassification, stock dividend or other similar capital event shall bear legends in substantially the following form:

THESE SECURITIES HAVE NOT BEEN REGISTERED OR OTHERWISE QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”) OR UNDER THE APPLICABLE OR SECURITIES LAWS OF ANY STATE. NEITHER THESE SECURITIES NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE SECURITIES LAWS OF ANY STATE, UNLESS PURSUANT TO EXEMPTIONS THEREFROM.

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO THE RESTRICTED STOCK AGREEMENT, DATED ____________, BETWEEN THE COMPANY AND THE ISSUEE WHICH RESTRICTS THE TRANSFER OF THESE SHARES WHICH ARE SUBJECT TO FORFEITURE TO THE COMPANY UNDER CERTAIN CONDITIONS.

Appropriate stop transfer instructions with respect to such shares have been placed with the Company’s transfer agent.

11.             Securities Act .  The Participant covenants and agrees with the Company that if, with respect to any shares of Common Stock delivered to the Participant pursuant to this Agreement, there does not exist a registration statement on an appropriate form under the Securities Act, which registration statement shall have become effective and shall include, or shall be accompanied by, as applicable, a prospectus that is current with respect to the shares of Common Stock subject to this Agreement, (i) he or she takes the shares of Common Stock for his or her own account and not with a view to the resale or distribution thereof, (ii) any subsequent offer for sale or sale of any such shares shall be made either pursuant to (x) a registration statement on an appropriate form under the Securities Act, which registration statement shall have become effective and shall be current with respect to the shares being offered and sold, or (y) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the Participant shall, prior to any offer for sale or sale of such shares, obtain a favorable written opinion from counsel for or approved by the Company as to the applicability of such exemption and (iii) the certificate or certificates evidencing such shares shall bear a legend to the effect of the foregoing.
 
12.             Conflicts .  This Agreement is subject to all terms, conditions, limitations and restrictions contained in the Plan, which shall be controlling in the event of any conflicting or inconsistent provisions. In the event, however, of any conflict between the provisions of this Agreement or the Plan and the provisions of an employment or change-in-control agreement between the Company and the Participant, as applicable, the provisions of the latter shall prevail.

13.             No Employment Contract .  This Agreement is not a contract of employment, as applicable, and the terms of the Participant’s employment shall not be affected hereby or by any agreement referred to herein except to the extent specifically so provided herein or therein. Nothing herein shall be construed to impose any obligation on the Company to continue the Participant’s employment, and it shall not impose any obligation on the Participant’s part to remain in the employ of the Company or any of its Affiliates.

14.            Governing Law .  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORD WITH THE LAWS OF THE STATE OF DELAWARE, EXCLUDING PRINCIPLES OF CONFLICTS OF LAW.

15.            Headings .  The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

16.            Counterparts .  This Agreement may be executed in any number of counterparts with the same effect as if all signing parties had signed the same document. All counterparts will be construed together and constitute the same instrument.


IN WITNESS WHEREOF, the undersigned have executed this Restricted Stock Agreement as of the date first written above.

TANDY LEATHER FACTORY, INC.


By:            ____________________________________________                                                          
Name:             ____________________________________________                                                   
Title:               ____________________________________________                                                 



ACCEPTED:

      
 
By:                                                             
 
[Insert the name of the Participant]