-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PXhvsB0CuxiM3xC8jNVQ3nvqhwXZws7p7skNldvzZ8gbsw50KlM5K82c07NyJ9Vg RZP9DXT+VX5R3o9xZ2wQ4w== /in/edgar/work/0000950134-00-008203/0000950134-00-008203.txt : 20000928 0000950134-00-008203.hdr.sgml : 20000928 ACCESSION NUMBER: 0000950134-00-008203 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000926 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDY BRANDS ACCESSORIES INC CENTRAL INDEX KEY: 0000869487 STANDARD INDUSTRIAL CLASSIFICATION: [2300 ] IRS NUMBER: 752349915 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18927 FILM NUMBER: 728923 BUSINESS ADDRESS: STREET 1: 690 E LAMAR BLVD STE 200 CITY: ARLINGTON STATE: TX ZIP: 76011 BUSINESS PHONE: 8172654113 MAIL ADDRESS: STREET 1: 690 E LAMAR BLVD CITY: ARLINGTON STATE: TX ZIP: 76011 10-K405 1 d80391e10-k405.txt FORM 10-K FOR FISCAL YEAR END JUNE 30, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 0-18927 TANDY BRANDS ACCESSORIES, INC. (Exact Name of Registrant as Specified in its Charter) A DELAWARE CORPORATION 75-2349915 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 690 E. LAMAR BLVD., SUITE 200 ARLINGTON, TEXAS 76011 (Address of Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (817) 548-0090 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS Common Stock, Par Value $1 Per Share Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing price of such stock as reported on September 14, 2000, through the National Market System of the National Association of Securities Dealers Automated Quotation System) was approximately $29,431,000. There were 5,808,968 shares of common stock, $1.00 par value per share, outstanding at September 14, 2000. DOCUMENTS INCORPORATED BY REFERENCE: (a) Annual Report to Stockholders for Fiscal Year Ended June 30, 2000 (incorporated by reference in Parts II and IV). (b) Definitive Proxy Statement for the Annual Meeting to be held October 17, 2000 (incorporated by reference in Part III). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FORM 10-K PART I ITEM 1. BUSINESS. Tandy Brands Accessories, Inc. ("the Company") is a leading designer, manufacturer and marketer of branded men's, women's and children's accessories, including belts and small leather goods such as wallets. The Company's product line also includes handbags, socks, scarves, hats, hair accessories, suspenders and cold weather accessories. Tandy Brands' merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including Dockers(R), Jones New York(R), Florsheim(R), Perry Ellis(R), Rolfs(R), Haggar(R), Bugle Boy(R), Canterbury(R), Prince Gardner(R), Princess Gardner(R), Amity(R), Don Loper(R), Accessory Design Group(R), Tex Tan(R) and Tiger(R), as well as private brands for major retail customers. The Company sells its products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, grocery stores, men's and women's specialty stores, golf pro shops and catalogs. On July 16, 1999, the Company purchased certain assets of Frank Spielberg Sales LLC ("Spielberg"), a handbag designer and marketer based in St. Louis, Missouri, for approximately $3.4 million. The cash purchase price was provided by drawing on existing bank lines. Spielberg supplies proprietary design, marketing and sourcing expertise for handbags under department store private labels and direct sales to retailers. The Company seeks increased accessory sales and earnings through a variety of means, including increased sales through the Company's current operating units, as well as growth through the acquisition of similar businesses. The following chart summarizes the Company's acquisitions:
NAME OF BUSINESS DATE ACQUIRED OR ASSETS ACQUIRED PRODUCT LINES BRANDS ACQUIRED - ------------- ------------------ ------------- --------------- May 1, 1992 Accessory Design Group Women's Accessory Design Group accessories and Belts June 1, 1993 Durite Leather Goods Women's apparel Various private brands and Accessories November 29, 1993 Accolade, Inc. Men's and boys' Always In Style(1) belts and Accessories April 4, 1994 Certain assets of Men's and women's Prince Gardner Prince Gardner small leather Princess Gardner Incorporated goods Royalle by Prince Gardner Royalle by Princess Gardner August 30, 1994 H.A. Sheldon, Inc. Men's belts, Various private brands wallets and Suspenders May 1, 1995 Canterbury Belts, Ltd. Men's, women's Canterbury and children's leather and fabric accessories May 12, 1998 Certain assets of AR Men's and women's Amity Rolfs Accessories Group, small leather Inc. goods June 1, 1998 Tiger Accessories, Men's and boys' Tiger Inc. belts July 16, 1999 Frank Spielberg Sales, Handbags Coletta, Decca & LLC Tempo
- --------------- (1) On March 27, 1995 the Company announced its decision to discontinue its Always In Style operations. 2 3 The Company distributes its products to nearly every type and size of retail operation. The Company's key brands and each brand's targeted distribution channels and products are as follows:
BRAND DISTRIBUTION CHANNEL PRODUCTS - ----- -------------------- -------- Dockers(R)................................. National chain stores Belts Department stores Handbags Specialty stores Small leather goods Jones New York(R).......................... Department stores Belts Specialty stores Small leather goods Florsheim(R)............................... Department stores Belts Specialty stores Small leather goods Perry Ellis(R)............................. Department stores Belts Specialty stores Rolfs(R)................................... Department stores Small leather goods Specialty stores Haggar(R).................................. National chain stores Belts Department stores Small leather goods Catalogs Bugle Boy(R)............................... National chain stores Belts Department stores Small leather goods Canterbury(R).............................. Specialty stores Belts Golf pro shops Small leather goods Prince Gardner(R).......................... National chain stores Small leather goods Specialty stores Princess Gardner(R)........................ National chain stores Small leather goods Specialty stores Amity(R)................................... Mass merchants Small leather goods National chain stores Coletta(R)................................. Mass merchants Handbags National chain stores Accessory Design Group(R).................. Mass merchants Belts National chain stores Women's accessories Tiger(R)................................... Mass merchants Belts National chain stores
The accessories market is highly fragmented, and management believes that the Company is one of the largest competitors in the accessories industry. Management believes the sectors of the accessories market that the Company serves have grown at an average annual rate of three to five percent in recent years. This growth has resulted from (i) the trend toward more casual attire, which has increased demand for accessories outside the traditional dress category, (ii) increased consumer awareness of branded accessories as a fashion and lifestyle statement and (iii) a desire for newness and change in accessories styles. As a result of recent consolidation in the retail industry, retailers have increasingly chosen to consolidate their supply bases to a core group of companies that have the resources and expertise to meet the retailers' increasing demands. Over the past several years, the Company's net sales growth has exceeded that of the accessories industry and the Company believes it is better positioned than its competitors to continue to capitalize on these market trends. 3 4 PRODUCTS [Chart] The Company's primary products are belts and small leather goods, such as wallets, which accounted for approximately 48.9% and 28.5%, respectively, of the Company's net sales for fiscal 2000. The Company's other products include women's handbags, socks, scarves, hats, hair accessories and men's neckwear, suspenders and other fashion accessories, which collectively accounted for the remaining 22.6% of net sales in fiscal 2000. Men's and boys' products accounted for approximately 58.6% of net sales during fiscal 2000, and women's and girls' products accounted for approximately 41.4% of net sales during the same period. Proprietary brands, licensed brands and private brands accounted for approximately 37.3%, 9.2% and 53.5%, respectively, of net sales during fiscal 2000.
Belts [Chart] The Company and its predecessors have been manufacturing and marketing belts for over 70 years, and belts remain the Company's largest single product category, representing approximately 48.9% of net sales in fiscal 2000. The Company competes in all four categories of the belt market: casual, work, dress and fashion. In fiscal 2000, Tandy Brands manufactured approximately 31.5% of the men's belts it distributed and imported the balance from China, Guatemala and various other countries
The continuing trend toward casual attire has created an increasing demand for belts other than those in the traditional dress category. However, trends in women's fashion dress categories that have created design offerings that do not require a belt have been attributable to sales weakness in certain categories of women's belts. The Company's belt sales were $93.0 million in fiscal 2000, which represents an increase of 3.8% compared to fiscal 1999. In fiscal 2000, sales of men's and boys' belts represented $75.0 million, or 80.6% of total belt sales, and women's and girls' belts represented $18.0 million, or 19.4% of total belt sales. Small Leather Goods [Chart] The Company's small leather goods consist primarily of men's and women's wallets. The Company's small leather goods are primarily sourced from manufacturers in foreign countries, such as China, due to the labor-intensive nature of manufacturing small leather goods and the relative low cost of labor in those countries.
4 5 Sales of the Company's small leather goods have increased in recent years as a result of increased market penetration through the use of licensed and proprietary brands. Sales of small leather goods accounted for approximately $54.1 million, or 28.5% of Tandy Brands' net sales in fiscal 2000. In fiscal 2000, sales of men's and boys' small leather goods represented $29.0 million, or 53.6% of total small leather goods sales, and women's and girls' small leather goods represented $25.1 million, or 46.4% of the Company's total small leather goods sales. Other Accessories In addition to belts and small leather goods, Tandy Brands distributes accessories such as women's handbags, socks, scarves, hats, hair accessories and men's suspenders. These products are marketed under certain of the Company's proprietary brands, licensed brands and private brands. These other accessories complement the Company's core belt and small leather goods products. All other accessory items sold by the Company are purchased by the Company from foreign and domestic sources and are manufactured according to the Company's design specifications. In fiscal 2000, Tandy Brands' sales of other accessories totaled $42.8 million, or 22.6% of its net sales. PROPRIETARY BRANDS [Chart] In addition to its licensed and private brands, Tandy Brands produces and markets products under its own registered trademarks and trade names. The Company owns leading and well recognized trademarks such as Rolfs, Amity, Canterbury, Prince Gardner, Princess Gardner, Royalle by Prince Gardner, and Royalle by Princess Gardner. The Company intends to build on the success of its proprietary brand portfolio by pursuing additional ownership opportunities and expanding the assortment of products offered and the retail channels served by its proprietary brands. Net sales under the Company's proprietary brands were approximately $70.8 million, or 37.3% of the Company's net sales in fiscal 2000.
EXCLUSIVE LICENSE AGREEMENTS Tandy Brands has been awarded exclusive license agreements for several well recognized brands, including Dockers, Jones New York, Florsheim, Perry Ellis, Bugle Boy, Haggar, Tex Tan, Beverly Hills Polo Club and Botany 500. Generally, these license agreements cover specific products and require that the Company pay annual royalties, ranging from two to eight percent of net sales, based on minimum sales quotas or sales. The terms of the agreements are typically four to ten years, with options to extend the terms, provided certain sales or royalty minimums are achieved. For fiscal 2000, sales of the Company's licensed products accounted for approximately 9.2% of the Company's net sales, with no sales associated with any individual license agreement accounting for more than five percent of net sales. PRIVATE BRAND PRODUCTS In fiscal 2000, private brand products accounted for approximately $101.8 million, or 53.5% of the Company's net sales. Private brand programs offer the Company's customers exclusivity and pricing control over their products, both of which are important factors in the retail marketplace. Management believes that the Company's flexible sourcing capabilities, advanced electronic inventory management and replenishment systems and design, product development and merchandising expertise provide retailers with a superior alternative to direct sourcing of their private brand products. The Company's principal private brand programs 5 6 include those for leading retailers such as Wal-Mart, JCPenney, Sears, and Target and nationally recognized private brand names such as Farah, Kathy Lee, Arizona, Jacqueline Ferrar, St. John's Bay and Cherokee. CUSTOMERS The Company sells its products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, major department stores, grocery stores, men's and women's specialty stores, golf pro shops and catalogs. The Company maintains strong relationships with major retailers in the United States and Canada, including Wal-Mart, Target, K Mart, Shopko, AAFES, Sears, JCPenney, Kohl's, May Department Stores, Dillard's, Mervyn's and Federated Department Stores. For fiscal 2000, Wal-Mart represented 38.1% of the Company's net sales. In fiscal 2000, the Company's top ten customers accounted for approximately 66.2% of net sales. The Company had firm backlog orders for fiscal years 2000 and 1999 totaling $9,914,000 and $9,432,000, respectively. Shipment of backlog orders in fiscal 2000 is subject to product availability prior to customer order cancellation dates. The Company currently uses electronic data interchange ("EDI") for electronic communications of invoices, shipping notices, purchase orders and other transactions. Due to the rapid fulfillment of EDI orders, the backlog at June 30, 2000 may not be indicative of future quarterly results. SALES, MARKETING, AND CUSTOMER SERVICE Management believes that the success of Tandy Brands has resulted in large part from the Company's strong customer relationships, strong sales and marketing organization and superior customer service, including "quick response" distribution, vendor inventory management services, EDI capabilities and expertise in the communication of fashion and lifestyle concepts through product lines and innovative point-of-sale presentations. The Company's accounts are developed and maintained through the coordinated efforts of senior management, regional managers, account executives and an organization of salespeople and independent sales representatives. Relationships with certain of the Company's national accounts such as Wal-Mart, Shopko, Kohls, Dillard's, JCPenney, Sears, K Mart and Target are managed by senior management or senior account executives. Senior managers are responsible for generating profitable performance results by developing, planning, selling and implementing merchandise programs for their accounts. Individual senior managers develop and maintain business relationships with customers' buyers and merchandise managers. Senior managers also develop and propose comprehensive programs relating to product, pricing and fixturing and assist customers' buyers and merchandise managers in the implementation of these programs. The implementation of marketing programs is coordinated through the efforts of senior and regional managers. Senior managers are compensated based on a combination of salary and bonus tied to various measures of profitability and sales performance. The Company's in-store customer service relationships with various specialty stores, national chain stores and major department stores are maintained by a nationwide team of more than 60 sales associates in the United States and approximately 20 sales associates in Canada, who are organized on a regional basis and supervised by regional sales managers. Sales associates are responsible for overseeing accounts within a defined geographic territory, developing and maintaining business relationships with their respective customers, preparing and conducting line presentations and assisting customers in the implementation of programs at the individual store level. In addition, sales associates may, depending upon the needs of an individual customer, assist in the maintenance and presentation of merchandise on the selling floor. The Company's regional sales organization is supported by account executives. All sales personnel other than senior managers are compensated based on a combination of salary and commission. MERCHANDISING AND PRODUCT DEVELOPMENT The Company's product development and merchandising professionals work closely with customers, suppliers and Tandy Brands' licensors to interpret market trends, develop new products and create and implement comprehensive merchandising programs which consist of packaging and point-of-sale fixturing and 6 7 presentation materials. The Company believes that its ability to design all of its products internally represents a significant competitive advantage because retail customers have become increasingly reliant on the design and merchandising expertise of their suppliers. COMPETITION Competition in the fashion accessories industry is intense. The Company's ability to remain competitive depends largely on its ability to maintain its customer relationships, create new designs and products and offer high quality merchandise at popular prices. The Company's men's and boys' belt business competes with a large number of companies, including Swank, Humphreys, Leegin, Max Leather and Salant. The Company's men's wallet business also competes with a large number of competitors, including Buxton, Humphreys, Mundi and Fossil. In women's and girls' belts, the Company competes primarily with Cipriani, Liz Claiborne, Circa and Fossil. The women's handbag business competes with Nine West, Liz Claiborne, Kenneth Cole, Fossil, Guess and others, while the women's personal leather goods business competes with Buxton, Mundi, Fossil, Liz Claiborne, Nine West and others. Tandy Brands competes on the basis of customer service, brand recognition, product quality and price. The Company believes that its ability to compete successfully is based on its strong customer relationships, superior customer service, strong national brand portfolio, national distribution capabilities, proprietary inventory management systems, flexible sourcing and product design and innovation. RAW MATERIALS AND SUPPLIERS The major raw materials for the Company's products are readily available from a variety of foreign and domestic sources. In fiscal 2000, the Company sourced certain finished products representing approximately 84% of its net sales from outside manufacturers, both domestic and foreign. The Company has strong relationships with a number of high quality, low-cost foreign manufacturers who provide particularly labor-intensive products, such as small leather goods, manufactured to the Company's specifications. MANUFACTURING OPERATIONS The Company's manufacturing facilities are located in Yoakum, Texas and Scarborough, Ontario. The Yoakum, Texas, facility has the capacity to manufacture approximately 5.3 million belts per year. During fiscal 2000, Tandy Brands' manufacturing facilities operated at approximately 74.5% of capacity. The Company continually seeks to increase the automation of its manufacturing operations. The Company believes that it is one of the lowest-cost domestic belt producers because of its automated equipment, large production volumes and economies of scale in raw materials and finished goods sourcing. GOVERNMENTAL REGULATIONS Many of the Company's products are manufactured in countries other than the United States. Accordingly, those countries and the United States may from time to time modify existing quotas, duties, tariffs, or import restrictions, or otherwise regulate or restrict imports in a manner which could be material and adverse to the Company. In addition, economic and political disruptions in Asia and other parts of the world from which the Company imports goods could have an adverse effect on the Company's ability to maintain an uninterrupted flow of products to its major customers. Due to the fact that the Company sells its products to retail exchange operations of the United States military, and thus is a supplier to the federal government, the Company must comply with all federal statutes applicable to federal government suppliers. EMPLOYEES The Company had approximately 987 employees as of June 30, 2000. The Company believes that employee relations are generally good. 7 8 ITEM 2. PROPERTIES. The Company owns and operates the various facilities in Yoakum, Texas, which are used for leather product manufacturing, product distribution and administrative offices. The Company leases facilities in Scarborough, Ontario, which are used for the manufacture and distribution of leather goods. Additionally, the Company leases warehouse space in Dallas, Texas, and office space in Arlington, Texas, New York, New York, San Francisco, California, St. Louis, Missouri and Hong Kong. The Company has a renewal option for its corporate office space in Arlington. The Company owns the West Bend, Wisconsin facility which is utilized for the distribution of small leather goods and handbags. Management believes Tandy Brands' various properties are adequate and suitable for the particular uses involved. The total space owned, leased and occupied by the Company as of June 30, 2000, was as follows:
APPROXIMATE SQUARE FEET ----------------------------- OWNED LEASED TOTAL ------- ------- ------- Warehouse and Office.................................. 413,000 226,000 639,000 Factory............................................... 63,000 27,000 90,000 ------- ------- ------- Total................................................. 476,000 253,000 729,000 ======= ======= =======
ITEM 3. LEGAL PROCEEDINGS. The Company is not involved in any material pending legal proceedings, other than ordinary routine litigation incidental to the Company's business. No material legal proceedings were terminated during the fourth quarter of the 2000 fiscal year. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of the 2000 fiscal year. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The principal market for the registrant's common stock is the NASDAQ National Market System. The high and low bid information for the Company's common stock for each full quarterly period within the two most recent fiscal years appears on page 28 of the Company's 2000 Annual Report to Stockholders, which information is incorporated herein by reference. (b) The approximate number of record holders of common stock on September 14, 2000, was 1,142. (c) The Company has never paid a cash dividend on its Common Stock. The Company currently intends to retain its earnings for the foreseeable future to provide funds for the expansion of its business. The payment of dividends in the future will be at the sole discretion of the Board of Directors and will depend upon the Company's profitability, financial condition, capital needs, future prospects, contractual restrictions and other factors deemed relevant by the Board of Directors. The Company's existing credit agreements currently contain covenants related to the maintenance of certain financial ratios which could impose certain limitations on the payment of dividends. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item appears on page 28 of the 2000 Annual Report to Stockholders, which information is incorporated herein by reference. 8 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item appears on pages 24 through 27 of the 2000 Annual Report to Stockholders, which information is incorporated herein by reference. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is subject to interest rate risk on its long-term debt. The Company manages its exposure to changes in interest rates by the use of variable and fixed interest rate debt. In addition the Company has hedged its exposure to changes in interest rates on a portion of its variable debt by entering into an interest rate swap agreement to lock in a fixed interest rate for a portion of these borrowings. During fiscal 1999, the Company entered into a five-year interest rate swap agreement, which expires on November 17, 2003, converting $15,000,000 of outstanding indebtedness from a variable to a fixed interest rate. Interest differentials to be paid or received because of the swap agreement are reflected as an adjustment to interest expense over the related debt period. The potential impact of market conditions on the fair value of the Company's indebtedness or its exposure to interest rate risk is not expected to be material. Given that such lines of credit bear interest at floating market interest rates, the fair value of amounts borrowed thereunder approximates carrying value. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item appears on pages 7 through 28 of the 2000 Annual Report to Stockholders, which information is incorporated herein by reference. Following is a cross reference for location of the requested information:
PAGE NUMBER IN THE TANDY BRANDS ACCESSORIES, INC. 2000 ANNUAL REPORT TO STOCKHOLDERS ----------------- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statements of Income for the Years Ended June 30, 2000, 1999 and 1998................................... 7 Consolidated Balance Sheets at June 30, 2000 and 1999....... 8 Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999 and 1998.............................. 9 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2000, 1999 and 1998.................. 10 Notes to Consolidated Financial Statements.................. 11-22 Selected Unaudited Quarterly Financial Data................. 22 Report of Independent Auditors.............................. 23 Selected Financial Data..................................... 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 9 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item appears under the captions "Re-Election of Directors," "Other Information You Need to Make a Decision -- Who are our executive officers?" and "Security Ownership of Certain Beneficial Owners -- Have our directors, executive officers and 10% stockholders complied with Section 16(a) of the Securities Exchange Act of 1934?" included in the Company's definitive Proxy Statement relating to the Company's 2000 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item appears under the caption "Other Information You Need to Make a Decision -- How do we compensate our executive officers?" included in the Company's definitive Proxy Statement relating to the Company's 2000 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item appears under the caption "Security Ownership of Certain Beneficial Owners" included in the Company's definitive Proxy Statement relating to the Company's 2000 Annual Meeting of Stockholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item appears under the caption "Other Information You Need to Make a Decision -- Did we have transactions with officers, directors or 5% stockholders" included in the Company's definitive Proxy Statement relating to the Company's 2000 Annual Meeting of Stockholders, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this Report: (1) The financial statements listed in response to Item 8 of this Report have been incorporated herein by reference to pages 7 through 28 of the Company's 2000 Annual Report to Stockholders. (2) Financial Statement Schedule: Report of Independent Auditors on Financial Statement Schedule For the three years in the period ended June 30, 2000, Schedule II -- Valuation and Qualifying Accounts The financial statement schedule should be read in conjunction with the consolidated financial statements in the Company's 2000 Annual Report to Stockholders. Financial statement schedules not included in this Report have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits: A list of the exhibits required to be filed as part of this Report is set forth in the Index to Exhibits, which immediately precedes such exhibits and is incorporated herein by reference. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of fiscal 2000. 10 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TANDY BRANDS ACCESSORIES, INC. (Registrant) /s/ J.S.B. JENKINS ------------------------------------ J.S.B. Jenkins President and Chief Executive Officer Date: September 26, 2000 Pursuant to the requirements of the Securities and Exchange Act of 1934, this has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME POSITION DATE ---- -------- ---- /s/ DR. JAMES GAERTNER Director and Chairman of September 26, 2000 - ----------------------------------------------------- the Board Dr. James Gaertner /s/ J.S.B. JENKINS Director September 26, 2000 - ----------------------------------------------------- J.S.B. Jenkins /s/ MARVIN J. GIROUARD Director September 26, 2000 - ----------------------------------------------------- Marvin J. Girouard /s/ C. A. RUNDELL, JR. Director September 26, 2000 - ----------------------------------------------------- C. A. Rundell, Jr. /s/ ROGER R. HEMMINGHAUS Director September 26, 2000 - ----------------------------------------------------- Roger R. Hemminghaus /s/ GENE STALLINGS Director September 26, 2000 - ----------------------------------------------------- Gene Stallings /s/ COLOMBE M. NICHOLAS Director September 26, 2000 - ----------------------------------------------------- Colombe M. Nicholas /s/ STANLEY T. NINEMIRE Senior Vice President and September 26, 2000 - ----------------------------------------------------- Chief Financial Officer Stanley T. Ninemire
11 12 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Tandy Brands Accessories, Inc. We have audited the consolidated financial statements of Tandy Brands Accessories, Inc. and subsidiaries as of June 30, 2000 and 1999, and for each of the three years in the period ended June 30, 2000, and have issued our report thereon dated August 4, 2000, incorporated by reference in this Annual Report on Form 10-K. Our audits also included the financial statement schedule listed in Item 14(a) of this Annual Report on Form 10-K. The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Fort Worth, Texas August 4, 2000 12 13 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED JUNE 30,
ADDITIONS BALANCE AT ----------------------------------- BALANCE AT BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER END OF DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD - ----------- ------------ ---------------- ---------------- -------------- ---------- 2000 Allowance for Doubtful Accounts And Returns........ $1,180,000 $426,000 $-0- $505,000 $1,101,000 1999 Allowance for Doubtful Accounts And Returns........ $1,116,000 $465,000 $-0- $401,000 $1,180,000 1998 Allowance for Doubtful Accounts And Returns........ $1,076,000 $362,000 $-0- $322,000 $1,116,000
- --------------- (1) Represents uncollectible accounts written off, net of recoveries. 13 14 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES EXHIBIT INDEX
INCORPORATED BY REFERENCE (IF APPLICABLE) -------------------------------------- EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT - ------------------------------ ---- ---- -------- ------- (3) Articles of Incorporation and by-laws 3.1 Certificate of Incorporation of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 3.1 3.2 By-laws of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 3.2 (4) Instruments defining the rights of security holders, including indentures 4.1 Certificate of Designations, Powers, Preferences, and Rights of Series A Junior Participating Cumulative Preferred Stock of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 4.1 4.2 Form of Common Stock Certificates of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 4.2 4.3 Form of Preferred Share Purchase Rights Certificate of Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 4.3 4.4 Rights Agreement dated November 7, 1990, between Tandy Brands Accessories, Inc. and First National Bank of Boston S-1 11/02/90 33-37588 4.4 4.5 Form of Rights Certificate of Tandy Brands Accessories, Inc. 8-K 11/02/99 0-18927 4.5 4.6 Amended and Restated Rights Agreement dated October 19, 1999, between Tandy Brands Accessories, Inc. and Bank Boston, N.A. 8-K 11/02/99 0-18927 4.6 (10) Material Contracts 10.1 Form of Distribution Agreement dated December 31, 1990, between The Bombay Company, Inc. and Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 10.1 10.2 Form of Service Agreement dated December 31, 1990, between The Bombay Company, Inc. and Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 10.2 10.3 Form of Tax Sharing Agreement dated December 31, 1990, between The Bombay Company, Inc. and Tandy Brands Accessories, Inc. S-1 11/02/90 33-37588 10.3 10.4 Form of Purchase Agreement dated December 31, 1990, between The Bombay Company, Inc. and Mr. J.S.B. Jenkins S-1 11/02/90 33-37588 10.4 10.6 Tandy Brands Accessories, Inc. Stock Purchase Program S-1 11/02/90 33-37588 10.6 10.7 Tandy Brands Accessories, Inc. Employees Investment Plan S-1 11/02/90 33-37588 10.7
14 15 10.8 Tandy Brands Accessories, Inc. 1991 Stock Option Plan* S-1 11/02/90 33-37588 .8 10 10.9 Form of Stock Option Agreement -- 1991 Stock Option Plan* S-1 11/02/90 33-37588 10.9 10.10 Tandy Brands Accessories, Inc. Stock Bonus Plan* S-1 11/02/90 33-37588 10.10 10.11 Tandy Brands Accessories, Inc. Family Security Plan S-1 11/02/90 33-37588 10.11 10.12 Form of Agreement under Family Security Plan S-1 11/02/90 33-37588 10.12 10.13 Tandy Brands Accessories, Inc. Key Executive Disability Plan* S-1 11/02/90 33-37588 10.13 10.14 Tandy Brands Accessories, Inc. Benefit Restoration Plan and related Trust Agreement and Amendments No. 1 and 2 thereto* 10-K 09/25/97 0-18927 10.14 10.15 Form of Indemnification Agreement between Tandy Brands Accessories, Inc. and Each of its directors and Officers S-1 11/02/90 33-37588 10.15 10.16 Office Lease Agreement dated March 6, 1991, between John Hancock Mutual Life Insurance Co. and Tandy Brands Accessories, Inc. relating to the corporate offices S-1 11/02/90 33-37588 10.16 10.17 Tandy Brands Accessories, Inc. Non-Qualified Formula Stock Option Plan for Non-Employee Directors S-8 02/10/94 33-75114 28.1 10.18 Tandy Brands Accessories, Inc. 1993 Employee Stock Option Plan and form of Stock Option Agreement Thereunder* S-8 02/10/94 33-75114 28.2 10.19 Tandy Brands Accessories, Inc. Non-Qualified Stock Option Plan for Non-Employee Directors S-8 02/10/94 33-75114 28.3 10.20 Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors S-8 06/03/96 333-8579 99.1 10.21 Credit Agreement between Tandy Brands Accessories, Inc. and Chase Bank of Texas, N.A., successor-in-interest to Texas Commerce Bank, N.A., dated June 30, 1994 and Amendments No. 1, 2, and 3 thereto. 10-K 09/25/97 0-18927 10.21 10.22 Credit Agreement between Tandy Brands Accessories, Inc. and NationsBank, N.A., successor-in-interest to Nations Bank of Texas, N.A., dated as of May 16, 1997. 10-K 09/25/97 0-18927 10.22 10.23 Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan* S-8 12/12/97 333-42211 99.2 10.24 Amendments No. 4 and 5 to the Credit Agreement between Tandy Brands Accessories, Inc. and Chase Bank (Texas Commerce) of Texas, N.A., dated as of June 10, 1994. 10-Q 05/13/98 0-18927 10.24
* Management compensatory plan. 15 16 10.25 Promissory Note between Tandy Brands Accessories, Inc. and NationsBank, N.A., dated as of May 16, 1998 and Amendment thereto. 10-K 09/21/98 0-18927 .25 10 10.26 Registration Statement dated August 12, 1998 of Tandy Brands Accessories, Inc. Common Stock. S-3 08/12/98 333-61235 99.3 10.27 Promissory Note between Tandy Brands Accessories, Inc. and NationsBank, N.A., dated September 16, 1998. 10-Q 11/10/98 0-18927 10.27 10.28 Amendment No. 6 to the Credit Agreement between Tandy Brands Accessories, Inc. and Chase Bank (Texas Commerce) of Texas, N.A., dated as of June 10, 1994. 10-Q 11/10/98 0-18927 10.28 10.29 Revolving Credit and Term Agreement between Tandy Brands Accessories, Inc. and NationsBank, N.A., dated as of November 17, 1998. 10-Q 02/12/99 0-18927 10.29 10.30 ISDA Master Agreement between Tandy Brands Accessories, Inc. and NationsBank, N.A., dated as of November 17, 1998. 10-Q 02/12/99 0-18927 10.30 10.31 Revolving Credit and Uncommitted Line of Credit Agreement between Tandy Brands Accessories, Inc. and Wells Fargo HSBC Trade Bank, N.A., dated as of April 30, 1999. 10-Q 05/14/99 0-18927 10.31 10.32 Tandy Brands Accessories, Inc. Employees Investment Plan as Amended and Restated Effective April 1, 1999. 10-Q 05/14/99 0-18927 10.32 10.33 Promissory Note between Tandy Brands Accessories, Inc. and NationsBank, N.A. dba Bank of America, N.A., dated as of May 17, 1999 and Amendment thereto. 10-K 09/21/98 0-18927 10.33 10.34 Promissory Note between Tandy Brands Accessories, Inc. Bank of America, N.A., dated as of November 1, 1999 10-Q 11/12/99 0-18927 10.34 10.35 Tandy Brands Accessories, Inc. 1997 Employee Stock Option Plan Tandy Brands Accessories, Inc. Nonqualified Formula Stock Option Plan for Non- Employee Directors* S-8 1/06/00 333-94251 99.3 10.36 Tandy Brands Accessories, Inc. Employees Investment Plan* S-8 6/02/00 333-38526 99.4 10.37 Second Amendment to Revolving Term Loan Agreement between Tandy Brands Accessories, Inc. and NationsBank, N.A. dba Bank of America, N.A., dated as of June 12, 2000 and Amendment thereto.** N/A N/A N/A N/A
16 17 10.38 First Amendment to the Revolving Credit Agreement between Tandy Brands Accessories, Inc. and Wells Fargo HSBC Trade Bank, N.A., dated as of June 21, 2000.** N/A N/A N/A N/A 10.39 Tandy Brands Accessories, Inc. Employees Investment Plan as Amended and Restated Effective June 1, 2000.** N/A N/A N/A N/A (13) Annual Report to security holders, Form 10-Q or quarterly report to security holders 13.1 Annual Report to Stockholders of Tandy Brands Accessories, Inc.** N/A N/A N/A N/A (21) Subsidiaries of the registrant 21.1 List of subsidiaries** N/A N/A N/A N/A (23) Consents of experts and counsel 23.1 Consent of Ernst & Young LLP** N/A N/A N/A N/A (27) Financial Data Schedule 27.1 Financial Data Schedule for the year ended June 30, 2000** N/A N/A N/A N/A
* Management compensatory Plan. ** Filed herewith. 17 EX-10.37 2 d80391e10-k.txt 2ND AMENDMENT TO REVOLVING TERM LOAN AGREEMENT 1 EXHIBIT 10.37 SECOND AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT This Second Amendment To Revolving Credit and Term Loan Agreement (this "SECOND AMENDMENT") is made by and between TANDY BRANDS ACCESSORIES, INC., a Delaware corporation ("BORROWER"), and BANK OF AMERICA, N.A. (formerly NationsBank, N.A.), a national banking association ("LENDER"). WHEREAS, the parties entered into that one certain Revolving Credit Loan Agreement dated November 17, 1998 (the Revolving Credit Loan Agreement dated November 17, 1998 and all amendments thereto and restated thereof are hereinafter referred to as the "LOAN AGREEMENT"); and WHEREAS, the parties entered into that one certain Amendment To Revolving Credit and Term Loan Agreement dated May 17, 1999 (the "FIRST AMENDMENT"); and WHEREAS, the parties desire to amend the Loan Agreement in certain respects. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows: 1. The definitions of "FIXED CHARGES" and "TERMINATION DATE" in Section 1 of the Loan Agreement are amended to read as follows: "FIXED CHARGES" means, for any period for Borrower and its Subsidiaries, the sum of (a) Cash Interest Expense, (b) scheduled principal payments of Indebtedness for borrowed money, (c) Capital Expenditures excluding Acquisition Capital Expenditures, (d) cash Dividends, and (e) cash tax expenses. "TERMINATION DATE" means (a) for the Revolving Credit Loan, the earliest of (i) May 17, 2002, (ii) the date that Lender's commitment to fund Advances hereunder is terminated pursuant to SECTION 8.2, or (iii) the date that Lender's commitment to fund Advances hereunder is reduced to zero pursuant to SECTION 2.1, and (b) for the Term Loan, November 17, 2003. 2. A new 7.13 is added to the Loan Agreement which shall read in its entirety as follows: 7.13 PURCHASE OF TREASURY STOCK. Borrower shall not permit the purchase price of treasury stock to exceed $8,000,000 in the aggregate. 1 2 3. Except as amended above and by the First Amendment, the Loan Agreement is ratified and confirmed and shall remain in full force and effect. 4. This Second Amendment shall be binding upon and inure to the benefit of the parties and their successors and assigns. 5. THIS WRITTEN AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENT BETWEEN THE PARTIES. Executed effective as of the 12th day of June, 2000. BORROWER: TANDY BRANDS ACCESSORIES, INC., a Delaware corporation, as Borrower By: /s/ STAN NINEMIRE ----------------------------------------- Stan Ninemire, Chief Financial Officer and Senior Vice President LENDER: BANK OF AMERICA, N.A., a national banking association, as Lender By: /s/ VINCENT A. LIBERIO ----------------------------------------- Vincent A. Liberio, Senior Vice President 2 3 GUARANTY THIS GUARANTY (herein so called) is executed as of June 12, 2000, by TANDY BRANDS ACCESSORIES HANDBAGS, INC., a Delaware corporation ("GUARANTOR"), for the benefit of BANK OF AMERICA, N.A. (formerly NationsBank, N.A.), a national banking association (together with its permitted successors or assigns, "LENDER"). WHEREAS, Tandy Brands Accessories, Inc., a Delaware corporation ("BORROWER") and Lender (including its permitted successors and assigns) have entered into a Revolving Credit and Term Loan Agreement dated as of November 17, 1998 (as amended, modified, supplemented, or restated from time to time, the "CREDIT AGREEMENT"); WHEREAS, provisions of the Credit Agreement permit Guarantor to directly or indirectly receive proceeds of Borrowings made pursuant thereto; and WHEREAS, this Guaranty is integral to the transactions contemplated by the Loan Documents and is a condition precedent to Lender's obligations to extend credit under the Loan Documents; ACCORDINGLY, for adequate and sufficient consideration, the receipt and adequacy of which are hereby acknowledged, Guarantor guarantees to Lender the prompt payment of the Guaranteed Debt (defined below) at, and at all times after, its maturity (by acceleration or otherwise) as follows: 1. DEFINITIONS. Terms defined in the Credit Agreement have the same meanings when used, unless otherwise defined, in this Guaranty. As used in this Guaranty: BORROWER means Borrower, Borrower as a debtor-in-possession, and any receiver, trustee, liquidator, conservator, custodian, or similar party appointed for Borrower or for all or substantially all of Borrower's assets under any Debtor Laws. CREDIT AGREEMENT is defined in the recitals to this Guaranty. GUARANTEED DEBT means, collectively, (a) the Obligation and (b) all present and future costs, attorneys' fees, and expenses reasonably incurred by Lender to enforce Borrower's, Guarantor's, or any other obligor's payment of any of the Guaranteed Debt, including, without limitation (to the extent lawful), all present and future amounts that would become due but for the operation of Sections 502 or 506 or any other provision of Title 11 of the United States Code and all present and future accrued and unpaid interest (including, without limitation, all post-maturity interest and any post-petition interest in any proceeding under Debtor Relief Laws to which Borrower or Guarantor becomes subject). GUARANTOR is defined in the preamble to this Guaranty. LENDER is defined in the preamble to this Guaranty. LOAN DOCUMENTS means, collectively, the Credit Agreement and all related "Loan Documents" (as such term is defined in the Credit Agreement). OBLIGATION means the "Obligation" as defined in the Credit Agreement. GUARANTY 4 2. GUARANTY. This is an absolute, irrevocable, and continuing guaranty, and the circumstance that at any time or from time to time the Guaranteed Debt may be paid in full does not affect the obligation of Guarantor with respect to the Guaranteed Debt incurred after that. This Guaranty remains in effect until the Guaranteed Debt is fully paid and performed, all commitments to extend any credit under the Loan Documents have terminated. Guarantor may not rescind or revoke its obligations with respect to the Guaranteed Debt. Notwithstanding any contrary provision, it is the intention of Guarantor and Lender, that the amount of the Guaranteed Debt guaranteed by Guarantor by this Guaranty shall be in, but not in excess of, the maximum amount permitted by fraudulent conveyance, fraudulent transfer, or similar Laws applicable to Guarantor. Accordingly, notwithstanding anything to the contrary contained in this Guaranty or any other agreement or instrument executed in connection with the payment of any of the Guaranteed Debt, the amount of the Guaranteed Debt guaranteed by Guarantor by this Guaranty shall be limited to an aggregate amount equal to the largest amount that would not render Guarantor's obligations hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provision of any applicable state law. 3. CONSIDERATION. Guarantor represents and warrants that its liability under this Guaranty may reasonably be expected to directly or indirectly benefit it. 4. CUMULATIVE RIGHTS. If Guarantor becomes liable for any indebtedness owing by Borrower to Lender, other than under this Guaranty, that liability may not be in any manner impaired or affected by this Guaranty. The rights of Lender under this Guaranty are cumulative of any and all other rights that Lender may ever have against Guarantor. The exercise by Lender of any right under this Guaranty or otherwise does not preclude the concurrent or subsequent exercise of any other right. 5. PAYMENT UPON DEMAND. If an Event of Default exists and is continuing, Guarantor shall, on demand and without further notice of dishonor and without any notice having been given to any Guarantor previous to that demand of either the acceptance by Lender of this Guaranty or the creation or incurrence of any Guaranteed Debt, pay the amount of the Guaranteed Debt then due and payable to Lender. It is not necessary for Lender, in order to enforce that payment by any Guarantor, first or contemporaneously to institute suit or exhaust remedies against Borrower or others liable on any Guaranteed Debt or to enforce rights against any collateral securing any Guaranteed Debt. 6. SUBROGATION AND CONTRIBUTION. Until payment in full of the Guaranteed Debt and the termination of the obligation of Lender to extend credit under the Loan Documents (a) Guarantor may not assert, enforce, or otherwise exercise any right of subrogation to any of the rights or Liens of Lender or any other beneficiary against Borrower or any other obligor on the Guaranteed Debt or any collateral or other security or any right of recourse, reimbursement, subrogation, contribution, indemnification, or similar right against Borrower or any other obligor on any Guaranteed Debt or any guarantor of it, (b) Guarantor defers all of the foregoing rights (whether they arise in equity, under contract, by statute, under common law, or otherwise), and (c) Guarantor defers the benefit of, and subordinates any right to participate in, any collateral or other security given to Lender or any other beneficiary to secure payment of any Guaranteed Debt. 7. NO RELEASE. Guarantor's obligations under this Guaranty may not be released, diminished, or affected by the occurrence of any one or more of the following events: (a) Any taking or accepting of any other security or assurance for any Guaranteed Debt; (b) any release, surrender, exchange, subordination, impairment, or loss of any collateral securing any Guaranteed Debt; (c) any full or partial release of the liability of any other obligor on the Obligation, except for any final release resulting from payment in full of such obligation; (d) the modification of, or waiver of compliance with, any terms of any other Loan Document; (e) the insolvency, bankruptcy, or lack of corporate or partnership power of any other obligor at any time liable for any Guaranteed Debt, whether now existing or occurring in the future; (f) any renewal, extension, or 2 GUARANTY 5 rearrangement of any Guaranteed Debt or any adjustment, indulgence, forbearance, or compromise that may be granted or given by Lender to any other obligor on the Obligation; (g) any neglect, delay, omission, failure, or refusal of Lender to take or prosecute any action in connection with the Guaranteed Debt or to foreclose, take, or prosecute any action in connection with any Loan Document; (h) any failure of Lender to notify Guarantor of any renewal, extension, or assignment of any Guaranteed Debt, or the release of any security or of any other action taken or refrained from being taken by Lender against Borrower or any new agreement between Lender and Borrower; it being understood that Lender is not required to give Guarantor any notice of any kind under any circumstances whatsoever with respect to or in connection with any Guaranteed Debt, other than any notice required to be given to Guarantor by law or elsewhere in this Guaranty; (i) the unenforceability of any Guaranteed Debt against any other obligor or any security securing same because it exceeds the amount permitted by Law, the act of creating it is ultra vires, the officers creating it exceeded their authority or violated their fiduciary duties in connection with it, or otherwise; or (j) any payment of the Obligation to Lender is held to constitute a preference under any Debtor Relief Law or for any other reason Lender is required to refund that payment or make payment to someone else (and in each such instance this Guaranty will be reinstated in an amount equal to that payment). 8. WAIVERS. To the maximum extent lawful, Guarantor waives all rights by which it might be entitled to require suit on an accrued right of action in respect of any Guaranteed Debt or require suit against Borrower or others, whether arising under Section 34.02 of the Texas Business and Commerce Code, as amended (regarding its right to require Lender to sue Borrower on accrued right of action following its written notice to Lender), Section 17.001 of the Texas Civil Practice and Remedies Code, as amended (allowing suit against it without suit against Borrower, but precluding entry of judgment against it before entry of judgment against Borrower), Rule 31 of the Texas Rules of Civil Procedure, as amended (requiring Lender to join Borrower in any suit against it unless judgment has been previously entered against Borrower), or otherwise. 9. LOAN DOCUMENTS. By execution hereof, Guarantor covenants and agrees that certain representations, warranties, terms, covenants, and conditions set forth in the Loan Documents are applicable to Guarantor and shall be imposed upon Guarantor, and Guarantor reaffirms that each such representation and warranty is true and correct and covenants and agrees to promptly and properly perform, observe, and comply with each such term, covenant, or condition. Moreover, Guarantor acknowledges and agrees that this Guaranty is subject to the offset provisions of the Loan Documents in favor of Lender. In the event the Credit Agreement ceases to remain in effect for any reason whatsoever during any period when any part of the Guaranteed Debt remains unpaid, the terms, covenants, and agreements incorporated herein by reference shall nevertheless continue in full force and effect as obligations of Guarantor under this Guaranty. 10. RELIANCE AND DUTY TO REMAIN INFORMED. Guarantor confirms that it has executed and delivered this Guaranty after reviewing the terms and conditions of the Loan Documents and such other information as it has deemed appropriate in order to make its own credit analysis and decision to execute and deliver this Guaranty. Guarantor confirms that it has made its own independent investigation with respect to Borrower's creditworthiness and is not executing and delivering this Guaranty in reliance on any representation or warranty by Lender as to that creditworthiness. Guarantor expressly assumes all responsibilities to remain informed of the financial condition of Borrower and any circumstances affecting Borrower's ability to perform under the Loan Documents to which it is a party or any collateral securing any Guaranteed Debt. 11. NO REDUCTION. The Guaranteed Debt may not be reduced, discharged, or released because or by reason of any existing or future offset, claim, or defense (except for the defense of complete and final payment of the Guaranteed Debt) of Borrower or any other obligor against Lender or against payment of the Guaranteed Debt, whether that offset, claim, or defense arises in connection with the Guaranteed Debt or otherwise. Those claims and defenses include, without limitation, failure of consideration, breach of warranty, 3 GUARANTY 6 fraud, bankruptcy, incapacity/infancy, statute of limitations, lender liability, accord and satisfaction, usury, forged signatures, mistake, impossibility, frustration of purpose, and unconscionability. 12. INSOLVENCY OF GUARANTOR. Should Guarantor become insolvent, or fail to pay Guarantor's debts generally as they become due, or voluntarily seek, consent to, or acquiesce in, the benefit or benefits of any Debtor Relief Law (other than as a creditor or claimant), or become a party to (or be made the subject of) any proceeding provided for by any Debtor Relief Law (other than as a creditor or claimant) that could suspend or otherwise adversely affect the rights of Lender granted hereunder, then, in any such event, the Guaranteed Debt shall be, as among Guarantor and Lender, a fully matured, due, and payable obligation of Guarantor to Lender (without regard to whether Borrower is then in default under the Loan Documents or whether the Obligation, or any part thereof, is then due and owing by Borrower to Lender), payable in full by Guarantor to Lender upon demand, and the amount thereof so payable shall be the estimated amount owing in respect of the contingent claim created hereunder. 13. LOAN DOCUMENT. This Guaranty is a Loan Document and is subject to the applicable provisions of SECTIONS 1 and 9 of the Credit Agreement, including, without limitation, the provisions relating to GOVERNING LAW, JURISDICTION, VENUE, SERVICE OF PROCESS, AND WAIVER OF JURY TRIAL, all of which are incorporated into this Guaranty by reference the same as if set forth in this Guaranty verbatim. 14. COMMUNICATIONS. For purposes of SECTIONS 9.4 of the Credit Agreement, Guarantor's address and telecopy number are as set forth next to Guarantor's signature on the signature page hereof. 15. AMENDMENTS, ETC. No amendment, waiver, or discharge to or under this Guaranty is valid unless it is in writing and is signed by the party against whom it is sought to be enforced and is otherwise in conformity with the requirements of SECTION 9.19 of the Credit Agreement. 16. PARTIES. This Guaranty benefits Lender, and its successors and assigns and binds Guarantor and its successors and assigns. The rights of Lender under this Guaranty may be transferred with any assignment of the Guaranteed Debt. The Credit Agreement contains provisions governing assignments of the Guaranteed Debt and of rights and obligations under this Guaranty. 17. ENTIRE AGREEMENT. This Guaranty embodies the entire agreement between Lender and Guarantor with respect to the guaranty by Guarantor of the Guaranteed Debt. This Guaranty supersedes all prior agreements and understandings, if any, with respect to guaranty by Guarantor of the Guaranteed Debt. No condition or conditions precedent to the effectiveness of this Guaranty exist. This Guaranty shall be effective upon execution by Guarantor and delivery to Lender. THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 4 GUARANTY 7 EXECUTED as of June 12, 2000. Address: 690 East Lamar, Suite 200 Arlington, Texas 76011 Telephone: (817) 548-0090 Facsimile: (817) 548-1144 Address of Lender: Bank of America, N.A. 500 West Seventh Street Second Floor Fort Worth, Texas 76102 Attn: Vincent A. Liberio GUARANTOR: TANDY BRANDS ACCESSORIES HANDBAGS, INC., A DELAWARE CORPORATION By: /s/ STAN NINEMIRE ----------------------------------------------- Stan Ninemire, Chief Financial Officer and Senior Vice President Executed by Lender for the purpose of the notice of final agreement set forth above: LENDER: BANK OF AMERICA, N.A. By: /s/ VINCENT A. LIBERIO - SVP ----------------------------------------------- Vincent A. Liberio, Senior Vice President 5 GUARANTY EX-10.38 3 d80391ex10-38.txt 1ST AMENDMENT TO THE REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10.38 June 21, 2000 Tandy Brands Accessories, Inc. 690 East Lamar Blvd. Arlington, Texas 76011 Ladies and Gentlemen: This First Amendment to the Revolving Credit Agreement (the "Amendment") will serve to set forth the amended terms of the financing transaction by and between TANDY BRANDS ACCESSORIES, INC. ("Borrower"), and WELLS FARGO HSBC TRADE BANK, N.A. ("Lender"). WHEREAS, Borrower and Lender have entered into that certain Revolving Credit Agreement, dated April 30, 1999, (the "Original Agreement" and as amended hereby, the "Credit Agreement"); and WHEREAS, the Borrower has requested that the Lender extend the maturity date under the Original Agreement, and the Lender is willing to do so subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: 1. DEFINITIONS. All capitalized terms used but not otherwise defined in this Amendment shall have the meaning ascribed to them in the Original Agreement. Unless otherwise specified, all section references herein refer to sections of the Original Agreement. 2. AMENDMENTS. The Original Agreement is hereby amended as follows: 2.1 AMENDMENT TO SECTION 1.1. The definitions specified below are amended as follows: a. The definition of "Fixed Charges" is amended to read as follows: "Fixed Charges" means, for any period for Borrower and its Subsidiaries, the sum of (a) Cash Interest Expense, (b) scheduled principal payments of Indebtedness for borrowed money, (c) Capital Expenditures excluding Acquisition Capital Expenditures, (d) cash Dividends, and (e) cash tax expenses. b. The definition of "NationsBank Credit Agreement" is amended to read as follows: 2 "Bank of America Credit Agreement" means the Revolving Credit and Term Loan agreement dated November 17, 1998 between Borrower and Bank of America, N.A., as may be amended from time to time. All references in the Credit Agreement to the Nations Bank Credit Agreement shall mean the Bank of America Credit Agreement. c. The definition of "Termination Date" is amended to read as follows: "Termination Date" means the earliest of (a) May 14, 2002, (b) the date that Lender's commitment to fund Advances hereunder is terminated pursuant to Section 8.2, or (c) the date that Lender's commitment to fund Advances hereunder is reduced to zero pursuant to Section 2.1. 2.2 Addition of Section 7.14. New Section 7.14 is added to the Credit Agreement as follows: 7.14 Purchase of Treasury Stock. Borrower shall not purchase its own shares for a purchase price in excess of $8,000,000 in the aggregate. 3. CONDITIONS PRECEDENT. As a condition precedent to the effectiveness of this Amendment, Borrower agrees to provide the following documents to Lender: (a) Each of the Guarantors shall execute and deliver to Lender a confirmation of guarantee in form and substance satisfactory to Lender confirming each Guarantor's guarantee of Borrower's indebtedness under the Credit Agreement; (b) Borrower agrees that it shall execute and deliver to Lender an Amended and Restated Revolving Credit Note; (c) Tandy Brands Accessories Handbags Inc. shall execute and deliver to Lender a Guaranty Agreement in form and substance satisfactory to Lender. 4. RATIFICATIONS, REPRESENTATIONS AND WARRANTIES. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Original Agreement and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Original Agreement are ratified and confirmed and shall continue in full force and effect. The Borrower and Lender agree that the Original Agreement, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. The Borrower represents and warrants that as of the date hereof, there is no Event of Default or Potential Default under the Credit Agreement. 5. BENEFITS. This Amendment shall be binding upon and inure to the benefit of Lender and Borrower, and their respective successors and assigns; provided, however, that Borrower may not, without the prior written consent of Lender, assign 2 3 any rights, powers, duties or obligations under this Amendment, the Original Agreement or any of the other Loan Documents. 6. CONSTRUCTION. This Amendment has been executed and delivered in the State of Texas, shall be governed by and construed in accordance with the laws of the State of Texas, and shall be performable by the parties hereto in Dallas County, Texas. 7. INVALID PROVISIONS. If any provision of this Amendment is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and the remaining provisions of this Amendment shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance. 8. ENTIRE AGREEMENT. The Original Agreement, as amended by this Amendment, contains the entire agreement among the parties regarding the subject matter hereof and supersedes all prior written and oral agreements and understandings among the parties hereto regarding same. 9. REFERENCE TO ORIGINAL AGREEMENT. The Original Agreement and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Original Agreement, as amended hereby, are hereby amended so that any reference in the Original Agreement to the Original Agreement shall mean a reference to the Original Agreement as amended hereby. 10. COUNTERPARTS. This Amendment may be separately executed in any number of counterparts, each of which shall be an original, but all of which, taken together, shall be deemed to constitute one and the same agreement. If the foregoing correctly sets forth our mutual agreement, please so acknowledge by signing and returning this Amendment to the undersigned. Very truly yours, WELLS FARGO HSBC TRADE BANK, N.A. By: /s/ PETER LOEFFLER ------------------------------- Name: PETER LOEFFLER ----------------------------- Title: VICE PRESIDENT ---------------------------- Lender's Address: 1445 Ross Avenue Dallas, Texas 75202 3 4 ACCEPTED as of the date first written above. BORROWER: TANDY BRANDS ACCESSORIES, INC. By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] ---------------------------- Title: SVP, CFO --------------------------- 4 EX-10.39 4 d80391ex10-39.txt EMPLOYEES INVESTMENT PLAN AS AMENDED AND RESTATED 1 EXHIBIT 10.39 TANDY BRANDS ACCESSORIES, INC. EMPLOYEES INVESTMENT PLAN As amended and restated effective July 1, 2000 2 TABLE OF CONTENTS
PAGE ARTICLE I - PURPOSE ........................................................ 2 ARTICLE II - DEFINITIONS AND CONSTRUCTION .................................. 2 2.1 DEFINITIONS ...................................................... 2 2.2 CONSTRUCTION ..................................................... 15 ARTICLE III - ELIGIBILITY AND PARTICIPATION ................................ 16 3.1 ELIGIBILITY REQUIREMENTS ......................................... 16 3.2 NOTIFICATION OF ELIGIBILITY ...................................... 16 3.3 RE-ENTRY OF PRIOR PARTICIPANTS ................................... 17 ARTICLE IV - CONTRIBUTIONS ................................................. 17 4.1 SALARY REDUCTION CONTRIBUTIONS ................................... 17 4.2 COMPANY MATCHING CONTRIBUTIONS ................................... 18 4.3 QUALIFIED NONELECTIVE CONTRIBUTIONS .............................. 19 4.4 SEVEN THOUSAND DOLLAR ($7,000.00) TEST ........................... 19 4.5 DEFERRAL PERCENTAGE TEST ......................................... 20 4.6 CONTRIBUTION PERCENTAGE TEST ..................................... 22 4.7 ROLLOVER CONTRIBUTIONS ........................................... 25 4.8 PRIOR PLAN EMPLOYEE CONTRIBUTIONS ................................ 27 4.9 PRIOR PLAN EMPLOYER CONTRIBUTIONS ................................ 27 ARTICLE V - ADJUSTMENT OF INDIVIDUAL ACCOUNTS .............................. 28 5.1 INDIVIDUAL ACCOUNTS .............................................. 28 5.2 METHOD OF ADJUSTMENT ............................................. 28 5.3 PAYROLL WITHHOLDING AGREEMENTS ................................... 29 ARTICLE VI - ALLOCATIONS ................................................... 31 6.1 SALARY REDUCTION AND ROLLOVER CONTRIBUTIONS ..................... 31 6.2 COMPANY MATCHING CONTRIBUTIONS .................................. 31 6.3 QUALIFIED NONELECTIVE CONTRIBUTIONS ............................. 32 6.4 ALLOCATION OF FORFEITURES ....................................... 32 6.5 NOTIFICATION TO PARTICIPANTS .................................... 33 6.6 MAXIMUM ANNUAL ADDITION TO ACCOUNT OR BENEFIT ................... 33
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PAGE ARTICLE VII - RETIREMENT .................................................. 36 7.1 NORMAL OR LATE RETIREMENT ....................................... 36 7.2 BENEFIT ......................................................... 36 ARTICLE VIII - DEATH ...................................................... 37 8.1 DESIGNATION OF BENEFICIARY ...................................... 37 8.2 BENEFIT ......................................................... 37 8.3 NO BENEFICIARY .................................................. 38 ARTICLE IX - DISABILITY ................................................... 38 9.1 BENEFIT ......................................................... 38 ARTICLE X - TERMINATION OF EMPLOYMENT AND FORFEITURES ..................... 39 10.1 ELIGIBILITY AND BENEFITS ........................................ 39 10.2 TIME OF PAYMENT ................................................. 40 10.3 FORFEITURES ..................................................... 40 ARTICLE XI - ADMINISTRATION ............................................... 41 11.1 APPOINTMENT OF COMMITTEE ........................................ 41 11.2 COMMITTEE POWERS AND DUTIES ..................................... 41 11.3 DUTIES AND POWERS OF THE PLAN ADMINISTRATOR ..................... 43 11.4 RULES AND DECISION .............................................. 44 11.5 COMMITTEE PROCEDURES ............................................ 44 11.6 AUTHORIZATION OF BENEFIT PAYMENTS ............................... 45 11.7 PAYMENT OF EXPENSES ............................................. 45 11.8 INDEMNIFICATION OF MEMBERS OF THE COMMITTEE ..................... 45 ARTICLE XII - NOTICES ..................................................... 45 12.1 NOTICE TO TRUSTEE ............................................... 45 12.2 SUBSEQUENT NOTICES .............................................. 46 12.3 RELIANCE UPON NOTICE ............................................ 46 ARTICLE XIII - DISTRIBUTIONS, WITHDRAWALS AND LOANS ....................... 47 13.1 METHOD OF PAYMENT ............................................... 47 13.2 TIME OF PAYMENT ................................................. 48 13.3 CASH OUT DISTRIBUTION ........................................... 54 13.4 MINORITY OR DISABILITY PAYMENTS ................................. 55 13.5 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS ................... 55 13.6 DIRECT ROLLOVER OF ELIGIBLE ROLLOVER DISTRIBUTIONS .............. 57
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PAGE 13.7 FINANCIAL HARDSHIP WITHDRAWALS .................................. 58 13.8 LOANS TO PARTICIPANTS ........................................... 60 13.9 WITHDRAWALS UPON ATTAINMENT OF AGE 59 1/2 ....................... 63 13.10 WITHDRAWALS FOR DISABILITY ...................................... 63 13.11 WITHDRAWAL OF PRE-1986 CONTRIBUTIONS: ........................... 64 13.12 SUSPENSION OF CONTRIBUTIONS ..................................... 65 ARTICLE XIV - TRUSTEE, INVESTMENT MANAGERS AND DIRECTED INVESTMENTS ....... 65 14.1 APPOINTMENT OF TRUSTEE .......................................... 65 14.2 APPOINTMENT OF INVESTMENT MANAGER ............................... 66 14.3 RESPONSIBILITY OF TRUSTEE AND INVESTMENT MANAGER ................ 66 14.4 BONDING OF TRUSTEE AND INVESTMENT MANAGER ....................... 67 14.5 PARTICIPANT DIRECTION OF INVESTMENT ............................. 67 ARTICLE XV - AMENDMENT AND TERMINATION OF PLAN ............................ 71 15.1 AMENDMENT OF PLAN ............................................... 71 15.2 RIGHT TO TERMINATE AND WITHDRAW ................................. 72 15.3 SUSPENSION AND DISCONTINUANCE OF CONTRIBUTIONS .................. 72 15.4 LIQUIDATION OF TRUST FUND ....................................... 73 15.5 CONSOLIDATION OR MERGER ......................................... 74 ARTICLE XVI - GENERAL PROVISIONS .......................................... 74 16.1 NO EMPLOYMENT CONTRACT .......................................... 74 16.2 MANNER OF PAYMENT ............................................... 74 16.3 NONALIENATION OF BENEFITS ....................................... 75 16.4 TITLES FOR CONVENIENCE ONLY ..................................... 75 16.5 VALIDITY OF PLAN ................................................ 75 16.6 PLAN BINDING .................................................... 76 16.7 RETURN OF CONTRIBUTIONS ......................................... 76 16.8 MISSING PARTICIPANTS OR BENEFICIARIES ........................... 76 16.9 QUALIFIED MILITARY SERVICE ...................................... 77 ARTICLE XVII - TOP-HEAVY RULES ............................................ 77 17.1 DEFINITIONS ..................................................... 77 17.2 DETERMINATION OF-TOP HEAVY STATUS ............................... 79 17.3 MINIMUM EMPLOYER CONTRIBUTION ................................... 81 17.4 MINIMUM VESTING ................................................. 81
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PAGE ARTICLE XVIII - ADOPTION AND WITHDRAWAL BY OTHER ORGANIZATIONS ............. 82 18.1 PROCEDURE FOR ADOPTION ........................................... 82 18.2 WITHDRAWAL ....................................................... 83 18.3 ADOPTION CONTINGENT UPON INITIAL AND CONTINUED QUALIFICATION ..... 83 ARTICLE XIX - FIDUCIARY PROVISIONS ......................................... 84 19.1 GENERAL ALLOCATION OF DUTIES ..................................... 84 19.2 FIDUCIARY DUTY ................................................... 85 19.3 FIDUCIARY LIABILITY .............................................. 85 19.4 CO-FIDUCIARY LIABILITY ........................................... 85 19.5 DELEGATION AND ALLOCATION ........................................ 86
iv 6 TANDY BRANDS ACCESSORIES, INC. EMPLOYEES INVESTMENT PLAN PREAMBLE WHEREAS, TANDY BRANDS ACCESSORIES, INC., a corporation formed under the laws of the State of Delaware (the "Company") previously adopted a stock bonus plan, effective as of January 1, 1991, which was spun off from the Tandy Brands Employees Investment Plan maintained by The Bombay Company, Inc. (formerly Tandy Brands, Inc.) when the Company became an independent, publicly traded corporation (the "Prior Plan"); and WHEREAS, the Company amended and restated the Prior Plan, effective April 1, 1999, to incorporate amendments which had previously been made, and to modify provisions of the plan to the extent necessary to comply with recent legislation, including the Small Business Job Protection Act of 1996 and the Taxpayer Relief Act of 1997; and WHEREAS, the Company now desires to amend and restate the Prior Plan to add a cash or deferred feature and to implement other design changes; NOW, THEREFORE, in consideration of the premises and to carry out the purposes and intent as set forth above, said Prior Plan is hereby restated, retitled, and amended in its entirety, superseded and replaced by this separate, restated Tandy Brands Accessories, Inc. Employees Investment Plan, effective July 1, 2000. There will be no gap or lapse in time or effect between such Plans and the existence of a qualified Plan shall be continuous and uninterrupted. The terms and conditions of this restated Tandy Brands Accessories, Inc. Employees Investment Plan are as follows: 1 7 ARTICLE I PURPOSE The purpose of this Plan is to reward Employees of the Employer, as hereinafter defined, for their loyal and faithful service, to share with the Employees a portion of the profits, to help the Employees accumulate funds for their later years, and to provide funds for their beneficiaries in the event of death or disability. The benefits provided by this Plan will be paid from a Trust Fund established by the Employer and will be in addition to the benefits Employees are entitled to receive under any other programs of the Employer and from the Social Security Act. This Plan and the separate related Trust forming a part hereof are established and shall be maintained for the exclusive benefit of the Participants hereunder and their beneficiaries. No part of the Trust Fund can ever revert to the Employer, except as hereinafter provided, or be used for or diverted to purposes other than the exclusive benefit of the Participants of this Plan and their beneficiaries. ARTICLE II DEFINITIONS AND CONSTRUCTION 2.1 Definitions: Where the following words and phrases appear in this Plan, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary: (a) Affiliate: A member of a controlled group of corporations (as defined in Section 414(b) of the Code), a group of trades or businesses (whether or not incorporated) which are under common control (as defined in Section 414(c) of the Code), or an affiliated service group (as defined in Section 414(m) of the Code) of which 2 8 an Employer is a member, or any entity otherwise required to be aggregated with an Employer pursuant to Section 414(o) of the Code and the regulations issued thereunder. (b) Allocation Date: The last day of the Plan Year. (c) Annual Compensation: The total amounts paid by an Employer to an Employee as remuneration for personal services rendered during each Plan Year, as reported on the Employee's federal income tax withholding statement or statements (Form W-2 or its subsequent equivalent), together with any amounts not includable in the gross income of the Employee pursuant to Sections 125 or 402(e)(3) of the Code, but Annual Compensation shall not include (i) any Company contributions made under the Tandy Brands Accessories Stock Purchase Program which are used to purchase stock for a participating Employee and are included in such Form W-2 as referred to above and (ii) any amounts realized from the exercise of a non-qualified stock option or from a disqualifying disposition of a stock option qualified under Section 423 of the Code, if any. Effective for Plan Years beginning on or after January 1, 1989 and before January 1, 1994, Annual Compensation shall not exceed $200,000, as adjusted by the Secretary of the Treasury for increases in the cost of living at the time and in the manner set forth in section 415(d) of the Code. Effective for Plan Years beginning on or after January 1, 1994, Annual Compensation shall not exceed $150,000, as adjusted by the Secretary of the Treasury for increases in the cost of living at the time and in the manner set forth in section 401(a)(17)(B) of the Code. On or before June 30, 1997, in determining the Annual Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant 3 9 who have not attained age 19 before the close of the year. If, as a result of the application of such rules, the adjusted limitation is exceeded, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Annual Compensation as determined under this paragraph prior to the application of this limitation. On or after July 1, 1997, the family aggregation rules required by section 414(q)(6) of the Code shall not apply. (d) Beneficiary: A person designated by a Participant or former Participant to receive benefits hereunder upon the death of such Participant or former Participant. (e) Break in Service: An Employee shall have a Break in Service for each Computation Period applicable to him in which he completes less than 501 Hours of Service with an Employer unless he is on a Leave of Absence authorized by an Employer in accordance with its uniform leave policy. (f) Code: The Internal Revenue Code of 1986, as amended. (g) Committee: The persons appointed to administer the Plan in accordance with Article XI. (h) Company: Tandy Brands Accessories, Inc., or its successor or successors. (i) Company Stock: Common stock of the Company which constitutes "qualifying employer securities" under section 4975(e)(8) of the Code. In the event Company Stock or other qualifying employer securities are not or become not readily tradeable on an established securities market, the fair market value thereof shall be as determined by an independent appraiser meeting requirements similar to those contained in Treasury Regulations promulgated under section 170(a)(1) of the Code. 4 10 (j) Company Matching Contributions: Contributions which may be made by an Employer for any Plan Year on behalf of a Participant who has elected to receive Salary Reduction Contributions for such Plan Year, as provided in Section 4.2 hereof. Company Matching Contributions shall be determined in the sole and absolute discretion of the board of directors of the Company. (k) Company Matching Contribution Account: A separate subaccount to which is credited a Participant's Company Matching Contributions, if any, and any earnings attributable thereto, adjusted to reflect any withdrawals, distributions or investment losses attributable thereto. (l) Computation Period: For purposes of determining eligibility to participate in the Plan, the Computation Period shall be the twelve (12) consecutive month period beginning on the date an Employee completes an Hour of Service, or any anniversary thereof, whichever is applicable. For purposes of determining a Participant's Years of Service, the Computation Period shall be the Plan Year. (m) Disability: A medically determinable physical or mental impairment that, as determined by the Committee, is of such permanence and degree that the Participant is, and for the indefinite future will be, unable to perform substantial gainful activity commensurate with his professional or other training, education, and experience, and comparable to his then or prior services for the Company. (n) Effective Date: July 1, 2000. (o) Employee: Any person who is receiving remuneration for personal services rendered to an Employer, or who would be receiving such remuneration except for an authorized leave of absence. The term "Employee" shall also include any "leased 5 11 employee", as such term is defined below, deemed to be an employee of an Employer or any Affiliate, as provided in Sections 414(n) or (o) of the Code. The term "leased employee" means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control by the recipient. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient shall be treated as provided by the recipient. A leased employee shall not be considered an employee of the recipient if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(e)(3), Section 402(h)(1)(B) or Section 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (ii) leased employees do not constitute more than twenty percent (20%) of the recipient's nonhighly compensated work force. (p) Employee Contributions or Prior Plan Employee Contributions: Voluntary, after tax contributions which, prior to July 1, 2000, could be made to the Prior Plan by a Participant, at his or her election. Prior Plan Employee Contributions shall include after tax contributions made on or before December 31, 1985 to the Tandy 6 12 Brands Employees Investment Plan maintained by the Bombay Company, Inc. (formerly Tandy Brands, Inc.) and subsequently spun off into the Prior Plan as of January 1, 1991 ("Pre-1986 Contributions") and after tax contributions made after December 31, 1985 ("Post-1986 Contributions"). When the term Prior Plan Employee Contributions is used, it shall mean both Pre-1986 Contributions and Post-1986 Contributions. (q) Employee Contribution Account or Prior Plan Employee Contribution Account: A separate subaccount to which is credited a Participant's Prior Plan Employee Contributions, if any, and any earnings attributable thereto, adjusted to reflect any withdrawals, distributions or investment losses attributable thereto. The Prior Plan Employee Contribution Account shall indicate which part is attributable to Pre-1986 Contributions (the "Pre-1986 Contribution Account") and which part is attributable to Post-1986 Contributions (the "Post-1986 Contribution Account"). Such accounts are primarily for accounting purposes and do not require a segregation of the Trust Fund, except as otherwise provided herein. (r) Employer: Tandy Brands Accessories, Inc. and such other organizations as may adopt the Plan in accordance with Article XVIII, and their successor or successors. (s) Entry Date: The first day of each calendar month. (t) ERISA: The Employee Retirement Income Security Act of 1974, as amended. (u) Fund or Trust Fund: All assets of whatsoever kind or nature held from time to time by the Trustee in the Trust forming a part of this Plan, without distinction as to income and principal and without regard to source, i.e., allocations, employer or employee contributions, earnings, forfeitures or gifts. 7 13 (v) Highly Compensated Employee: The term Highly Compensated Employee includes highly compensated active employees and highly compensated former employees. A highly compensated active employee includes any employee who performs Service for the Employer during the determination year and who, during the look-back year, received compensation from the Employer in excess of $80,000 (as adjusted pursuant to Section 415(d) of the Code). The term Highly Compensated Employee also includes Employees who are Five Percent (5%) Owners (as defined in Section 17.1(g) hereof) at any time during the look-back year or determination year. For purposes of this Section 2.1(v), the determination year shall be the Plan Year. The look-back year shall be the twelve-month period immediately preceding the determination year. For purposes of this Section 2.1(v), the term "compensation" shall have the same meaning as the term "Annual Compensation," as defined in Section 2.1(c) hereof; provided, however, that any Company contributions made under the Tandy Brands Accessories Stock Purchase Program which are used to purchase stock for a participating Employee and are included in Form W-2 and any amounts realized from the exercise of a nonqualified stock option or from a disqualifying disposition of a stock option qualified under Section 423 of the Code, if any, shall be included in "compensation" for the purposes of this Section 2.1(v). A highly compensated former employee includes any Employee who separated from service (or was deemed to have separated from service) prior to the determination year, performs no Service for the Employer during the determination year, and was a highly compensated active employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. The determination of the identity 8 14 of Highly Compensated Employees will be made in accordance with Section 414(q) of the Code and the regulations thereunder. (w) Hour of Service: Each hour connected with an Employee's Service, either before or after the Effective Date, for an Employer and described in one or more of the paragraphs (i) through (iii) below: (i) Each hour for which an Employee is paid, or entitled to be paid, for the performance of duties during the applicable period, shall be an Hour of Service. (ii) Each hour for which an Employee is paid, or entitled to be paid, by an Employer on account of a period of time during which such person performs no duties, even if the employment relationship has terminated, due to vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty, or leave of absence, shall be an Hour of Service. Notwithstanding the foregoing sentence, (1) Not more than 501 hours shall be credited under this paragraph (ii) to the Employee on account of any single continuous period during which he performs no duties; (2) No hours shall be credited under this paragraph (ii) on account of hours for which the Employee is paid or entitled to be paid under a plan maintained solely for the purpose of complying with applicable workmen's compensation, unemployment compensation, or disability insurance laws; and 9 15 (3) No hours shall be credited on account of a payment to the Employee solely as reimbursement for medical or related expenses incurred by such person. Only for purposes of this paragraph (ii), a payment shall be deemed to be made by or due from the Employer directly, or indirectly through a trust, fund, insurer, or other entity, to which the Employer contributes or pays premiums, and regardless of whether such contributions are for the benefit of particular employees or a group of employees in the aggregate. (iii) With respect to periods either before or after the Effective Date during which no duties were performed, each hour for which back pay is awarded or agreed to by an Employer shall be an Hour of Service, regardless of any mitigation of damages. However, any such hours with respect to periods described in paragraph (ii) shall be subject to all of the limitations set forth in paragraph (ii). If an Employer maintains records of Hours of Service for Employees, such hours shall be used. For Employees, such as exempt salaried workers, for whom such records are not available, credit for Hours of Service will be at the rate of 45 hours for each week of employment. In determining the number of Hours of Service to be credited to an Employee in the case of a payment which is made or due to an Employee under the provisions of the paragraphs above, the Committee of the Plan shall apply the rules set forth in Department of Labor Regulations Section 2530.200b-2(b) and (c), which rules are incorporated into and made a part of this Plan by reference. 10 16 For purposes of determining whether an Employee has incurred a Break in Service as defined in Section 2.1(e), the Committee shall credit an Employee with Hours of Service during absence from work for maternity or paternity reasons which would otherwise have been credited to such Employee but for such absence. In the case of such absence, if the actual number of hours cannot be determined, the Employee shall be credited with eight (8) Hours of Service per day of such absence. For purposes of this Plan, an Employee shall be deemed to be on maternity or paternity leave if the Employee's absence from work is by reason of the pregnancy of the Employee, by reason of the birth of a child of the Employee, by reason of the placement of a child with the Employee in connection with the adoption of such child by the Employee, or for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be limited to the lesser of the number necessary to prevent the Employee from incurring a Break in Service or 501 Hours of Service. Hours of Service credited under this paragraph shall be credited in the Plan Year in which the absence begins, but if the Employee does not need those Hours of Service to prevent a Break in Service in the Plan Year in which the absence began, then they shall be credited in the immediately following Plan Year. This paragraph shall apply for absence periods which begin in Plan Years commencing after 1984. (x) Individual Account: The account or record maintained by the Committee showing the monetary value of the individual interest in the Trust Fund of each Participant, former Participant and Beneficiary. 11 17 (y) Investment Managers: The qualified and acting Investment Managers, as defined in ERISA, who under this Plan may be appointed by the Committee to invest and manage Plan assets as fiduciaries. (z) Leave of Absence: Any period during which an Employee is not receiving a salary from his Employer for a reason which the Employer shall consider not to constitute a termination of employment. A Leave of Absence shall be granted in accordance with an Employer's rules or practices uniformly applied to the granting of Leaves of Absence. Any period required by law to be counted as service (e.g., certain military service) shall be deemed to be a Leave of Absence in accordance with such rules as may be adopted by the Committee. (aa) Named Fiduciary: The Committee shall be the Named Fiduciary designated to manage the operation and administration of the Plan. (bb) Normal Retirement Date: The 65th birthday of a Participant. (cc) Participant: An Employee who has met the eligibility requirements for participation in this Plan, as set forth in Article III hereof (dd) Plan: Tandy Brands Accessories, Inc. Employees Investment Plan, as amended from time to time. (ee) Plan Administrator: Such person or persons as designated by the Committee, which shall be the Committee unless and until it designates such other person or persons. (ff) Plan Year: The twelve (12) month period beginning July 1st and ending June 30th, both dates inclusive of each year. 12 18 (gg) Prior Plan: The Tandy Brands Accessories, Inc. Employees Investment Plan, effective January 1, 1991, as amended and restated effective April 1, 1999. (hh) Prior Plan Employer Contributions: Contributions made by the Company to the Prior Plan under the terms of the Prior Plan, attributable to any period ending prior to July 1, 2000. (ii) Prior Plan Employer Contribution Account: A separate subaccount to which is credited a Participant's Prior Plan Employer Contributions and any other employer contributions made under the Prior Plan, if any, and any earnings attributable thereto, adjusted to reflect any withdrawals, distributions or investment losses attributable thereto. (jj) qualified Nonelective Contributions: Contributions which may, at the election of the Company, be made to the Plan in an amount necessary to assure the Plan's compliance with the deferral percentage test described in Section 4.5 hereof or the contribution percentage test described in Section 4.6 hereof or other nondiscrimination requirements as permitted under the Code. (kk) Qualified Nonelective Contribution Account: A separate subaccount to which is credited a Participant's Qualified Nonelective Contributions, if any, and any earnings attributable thereto, adjusted to reflect any withdrawals, distributions or investment losses attributable thereto. (11) Retirement: Termination of employment after a Participant has reached his Normal Retirement Date. Retirement shall be considered as commencing on the day immediately following a Participant's last day of employment. 13 19 (mm) Rollover Contributions: Contributions which may be made to the Plan by a Participant or Employee, as provided in Section 4.7 hereof. (nn) Rollover Contribution Account: A separate subaccount to which is credited a Participant's or Employee's Rollover Contributions, if any, and any earnings attributable thereto, adjusted to reflect any withdrawals, distributions or investment losses attributable thereto. (oo) Salary Reduction Contributions: Contributions made to the Plan by the Company, at the election of a Participant, in lieu of cash compensation, pursuant to a payroll withholding agreement, as provided in Section 4.1 hereof. (pp) Salary Reduction Contribution Account: A separate subaccount to which is credited a Participant's Salary Reduction Contributions, if any, and any earnings attributable thereto, adjusted to reflect any withdrawals, distributions or investment losses attributable thereto. (qq) Service: A period or periods of employment by an Employee used in determining eligibility for Plan participation or in determining the amount of benefits. Service shall include any employment with any Affiliate of an Employer. (rr) Trust: The Tandy Brands Accessories, Inc. Employees Investment Plan Trust, as amended from time to time, the trust or trusts established to hold and invest contributions made under the Plan for the exclusive benefit of the Participants included in the Plan from which the benefits will be distributed. (ss) Trustee: The qualified and acting trustee or trustees under the Trust. (tt) Valuation Date: Each day on which the financial markets are open for trading activity; provided, however, on a day on which the financial markets are not 14 20 open, the Valuation Date shall be the next preceding day on which the financial markets were open for trading activity. (uu) Year of Service: A Computation Period applicable to an Employee in which he completes at least 1,000 Hours of Service. All of an Employee's Years of Service shall be counted, subject to the following exceptions: (i) Prior to the Effective Date, Years of Service shall be computed and counted pursuant to the provisions of the Prior Plan in effect on the day before the Effective Date. (ii) Any Employee shall receive credit for Years of Service incurred while employed with a predecessor of an Employer hereunder, whether such predecessor was a corporation, partnership, sole proprietorship or other business entity. A predecessor shall include any business entity whose capital stock or assets were acquired by any Employer participating in this Plan. (iii) If an Employee who does not have any nonforfeitable right to his Individual Account incurs a period of consecutive Breaks in Service that equals or exceeds the greater of (1) five or (2) the aggregate number of Years of Service incurred before such period, then all of his prior Years of Service before such period shall no longer be credited to him. 2.2 Construction: The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. The words "hereof," "herein," "hereunder," and other similar compounds of the word "here" shall mean and refer to the entire Plan, not to any particular provision or section. The Plan and Trust shall each form a part of the other by reference and terms shall be used therein interchangeably. 15 21 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.1 Eligibility Requirements: Every Employee on the Effective Date, who was A Participant in the Prior Plan on the day before the Effective Date, shall continue to be a Participant in the Plan. Every other Employee shall become a Participant in the Plan as of the first Entry Date concurrent with or next following the last day of such Employee's Computation Period during which he first completes a Year of Service. Notwithstanding the foregoing, (a) Employees included in a unit of Employees covered by a collective bargaining agreement between employee representatives and an Employer, if retirement benefits were the subject of good faith bargaining between such employee representatives and the Employer, shall not be eligible to participate in the Plan unless such collective bargaining agreement expressly provides for the inclusion of such Employees under the Plan; (b) Non-resident aliens who receive no earned income from an Employer which constitutes income from sources within the United States shall not be eligible to participate in the Plan; (c) Individuals classified as independent contractors or Leased Employees under the Employer's customary worker classification procedures shall not be eligible to participate in the Plan, regardless of whether or not such individual is actually an employee. An Employee's allocation of contributions under the Plan shall take into account his Annual Compensation for only that portion of the Plan Year during which he is eligible to participate in the Plan. 3.2 Notification of Eligibility: The Committee shall promptly notify in writing each Employee of his qualification as a Participant and shall furnish each new Participant a copy of such explanation of the Plan as the Committee shall provide for that purpose. 16 22 3.3 Re-entry of Prior Participants: (a) An Employee who terminates employment after becoming a Participant hereunder shall be eligible to participate immediately upon his completion of one Hour of Service following his re-employment by an Employer; provided, however, if the Participant did not have a nonforfeitable right to any portion of his Individual Account at the time of his termination of employment and he is re-employed after incurring a period of consecutive Breaks in Service that equals or exceeds the greater of (i) five or (ii) the aggregate number of Years of Service incurred before his termination of employment, then he must satisfy the requirements of Section 3.1 after his re-employment. (b) In the event a Participant becomes ineligible to participate because he is no longer a member of an eligible class of Employees, but he has not incurred a Break in Service, such Employee shall participate immediately upon his return to an eligible class of Employees. If such Participant incurs a Break in Service his eligibility to participate shall be determined pursuant to Section 3.3(a) above. In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee shall participate immediately if he has satisfied the requirements of Section 3.1 and would have previously become a Participant had he been in the eligible class. ARTICLE IV CONTRIBUTIONS 4.1 Salary Reduction Contributions: Each Participant may elect to have contributed on his behalf to the Trust Fund, on a pre-tax basis, any whole percentage of his Annual Compensation which is not less than one percent (1%) and which does not exceed ten percent 17 23 (10%); provided, however, that such amount may not exceed Seven Thousand Dollars ($7,000.00), indexed for increases in the cost of living, as provided in Section 402(g)(5) of the Code, in any taxable year of such Participant. Salary Reduction Contributions shall be elected pursuant to a payroll withholding agreement, in accordance with Section 5.3 hereof. In the event that a payroll withholding agreement is not received for a Participant, a payroll withholding agreement is deemed to have been made and such Participant will be treated as if he elected one percent (1%) of his Annual Compensation to be contributed to the Trust Fund on his behalf as Salary Reduction Contributions. Salary Reduction Contributions are at all times one hundred percent (100%) vested and nonforfeitable. Salary Reduction Contributions made on behalf of a Participant shall be added to the Trust Fund as soon as practicable after deduction from a Participant's paycheck, and shall be credited to the Salary Reduction Contribution Account of the Participant in accordance with Section 6.1. 4.2 Company Matching Contributions: The Employer shall contribute to the Trust Fund Company Matching Contributions in the amount of one hundred percent (100%) of each Participant's Salary Reduction Contributions, not to exceed five percent (5%) of Annual Compensation. Company Matching Contributions shall be paid to the Trust Fund as soon as practicable following the end of each calendar month with respect to which the applicable Salary Reduction Contributions are made, and shall be credited to the Company Matching Contribution Account of each eligible Participant who has Salary Reduction Contributions made to the Trust Fund on his behalf during the applicable period as provided in Section 6.2. The board of directors of the Company, in its sole discretion, may change the Company Matching Contribution percentage at any time. 18 24 4.3 Qualified Nonelective Contributions: Each Employer shall, for each Plan Year, contribute to the Trust Fund such Qualified Nonelective Contributions, if any, as the board of directors of the Company shall determine. The amount of Qualified Nonelective Contributions, if. any, shall be determined in the sole and absolute discretion of the board of directors of the Company. Qualified Nonelective Contributions are at all times one hundred percent (100%) vested and nonforfeitable. Qualified Nonelective Contributions shall be added to and become a part of the Trust Fund, and, as of each Allocation Date, shall be credited to the Individual Accounts of the eligible Participants, as provided in Section 6.3. 4.4 Seven Thousand Dollar ($7.000.00) Test: If a Participant's Salary Reduction Contributions hereunder should exceed Seven Thousand Dollars ($7,000.00), indexed for increases in the cost of living, as set forth in Section 402(g)(5) of the Code, in any taxable year of the Participant, the excess (with earnings thereon) shall be distributed to the Participant. If the Participant also participates in another elective deferral program (within the meaning of Section 402(g)(3) of the Code) and if, when aggregating his elective deferrals under all such programs, an excess of deferral contributions arises under the dollar limitation in Section 402(g) of the Code with respect to such Participant, the Participant shall, no later than March 1st following the close of the Participant's taxable year, notify the Committee as to the portion of such excess deferrals to be allocated to this Plan and such excess so allocated to this Plan (with earnings thereon) shall be distributed to the Participant. In the event there is a loss allocable to an excess deferral, any distribution to a Participant as required by this Section 4.4 shall be no greater than the lesser of: (a) the value of the Participant's Salary Reduction Contribution Account or (b) the Participant's excess deferrals for the Plan Year. Any distribution under this 19 25 Section shall be made to the Participant no later than the April 15th immediately following the close of the Participant's taxable year for which such excess deferrals were made. 4.5 Deferral Percentage Test: Each Plan Year, the Committee shall determine: (a) The "deferral percentage" for each Employee who is then eligible for Salary Reduction Contributions, which, in the case of a Highly Compensated Employee, shall be the ratio of the amount of such Highly Compensated Employee's Salary Reduction Contributions for such Plan Year to the Highly Compensated Employee's compensation (as defined in Section 2.1(v) hereof) for such Plan Year, and, which in the case of an Employee who is not a Highly Compensated Employee, shall be the ratio of the amount of such Employee's Salary Reduction Contributions for such Plan Year to such Employee's compensation (as defined in Section 2.1(v) hereof) for such Plan Year; (b) The "highly compensated deferral percentage," which shall be the average of the "deferral percentages" for all Highly Compensated Employees then eligible for Salary Reduction Contributions; and (c) The "nonhighly compensated deferral percentage," which shall be the average of the "deferral percentages" for all Employees then eligible for Salary Reduction Contributions who were not included in the "highly compensated deferral percentage," in (b) above. In no event shall the "highly compensated deferral percentage" exceed the greater of: (i) a deferral percentage equal to one and one-fourth (1 1/4) times the "nonhighly compensated deferral percentage" or (ii) a deferral percentage equal to two (2) times the "nonhighly compensated deferral percentage," but not more than two (2) percentage points greater than the "nonhighly compensated deferral percentage," or such lesser amount as the Secretary of Treasury may 20 26 prescribe to prevent the multiple use of this alternative limitation, as set forth in Section 1.401(m)-2(b) of the Treasury Regulations. In the event that multiple use of the alternative limitation occurs with respect to any Plan Year, then either the "highly compensated contribution percentage," as defined in Section 4.6 hereof, or the "highly compensated deferral percentage," as defined above, shall be reduced, such reduction and the Highly Compensated Employees to whom such reduction shall apply to be determined by the Committee in accordance with Section 1.401(m)-2(c) of the Treasury Regulations. If the above deferral percentage test would otherwise be violated as of the end of the Plan Year, then, subject to satisfaction of the conditions described in Section 1.401(k)-1(b)(5) of the Treasury Regulations, the "deferral percentage," as defined in (a) above, shall instead be the ratio of the sum of the Employee's Salary Reduction Contributions, Qualified Nonelective Contributions, if any, and, to the extent necessary to satisfy the deferral percentage test, Company Matching Contributions for the applicable Plan Year to the Employee's compensation (as defined in Section 2.1(v) hereof) for the applicable Plan Year. Any Company Matching Contributions so utilized to satisfy the deferral percentage test shall at all times be one hundred percent (100%) vested and nonforfeitable and shall be excluded from consideration for purposes of the contribution percentage test described in Section 4.6. If, after consideration of Qualified Nonelective Contributions, if any, and applicable Company Matching Contributions, as described above, the deferral percentage test would still be violated as of the end of the Plan Year, then notwithstanding any other provision hereof, every Salary Reduction Contribution included in the "highly compensated deferral percentage" for a Participant whose deferral percentage is greater than the permitted maximum shall be revoked to the extent necessary to comply with such deferral percentage test and the amount of such Salary Reduction Contribution, to the extent 21 27 revoked, shall constitute an "excess contribution" to be distributed to such Participant (with earnings thereon) no later than the last day of the Plan Year following the Plan Year for which such contribution was made. Excess contributions are allocated to the Highly Compensated Employees with the largest amounts of Employer contributions which are taken into account in calculating the deferral percentage test for the Plan Year in which the excess arose, beginning with the Highly Compensated Employee with the largest amount of such Employer contributions and continuing in descending order until all excess contributions have been allocated. For purposes of the preceding sentence, the "largest" amount is determined after distribution of any amounts distributed hereunder pursuant to Section 4.4 hereof. In the event there is a loss allocable to an excess contribution, any distribution to a Participant as required by this Section shall be no greater than the lesser of: (1) the value of the Participant's Salary Reduction Contribution Account or (2) the Participant's excess contribution for the Plan Year during which such excess contribution was made. If a Highly Compensated Employee participates in two (2) or more plans maintained by an Employer or any Affiliate that are subject to the deferral percentage test, then such Employee's deferral percentage shall be determined by aggregating his participation in all such plans. In addition, if an Employer maintains two (2) or more plans subject to the deferral percentage test and such plans are treated as a single plan for purposes of the requirements for qualified plans under either Section 410(b) or 401(a)(4) of the Code, then such plans are treated as a single plan for purposes of the deferral percentage test. 4.6 Contribution Percentage Test: Each Plan Year, the Committee shall determine: (a) The "contribution percentage," for each Employee who is then eligible to receive Company Matching Contributions, which, in the case of a Highly Compensated 22 28 Employee, shall be the ratio of the sum of such Employee's Company Matching Contributions for such Plan Year to the Highly Compensated Employee's compensation (as defined in Section 2.1(v) hereof) for such Plan Year, and, which in the case of an Employee who is not a Highly Compensated Employee, shall be the ratio of the amount of such Employee's Company Matching Contributions for such Plan Year to such Employee's compensation (as defined in Section 2.1(v) hereof) for such Plan Year. (b) The "highly compensated contribution percentage," which shall be the average of the "contribution percentages" for all eligible Highly Compensated Employees; and (c) The "nonhighly compensated contribution percentage," which shall be the average of the "contribution percentages" for all Employees then eligible who were not included in the "highly compensated contribution percentage" in (b) above. In no event shall the "highly compensated contribution percentage" exceed the greater of: (i) a contribution percentage equal to one and one-fourth (1 1/4) times the "nonhighly compensated contribution percentage" or (ii) a contribution percentage equal to two (2) times the "nonhighly compensated contribution percentage," but not more than two (2) percentage points greater than the "nonhighly compensated contribution percentage," or such lesser amount as the Secretary of Treasury may prescribe to prevent the multiple use of this alternative limitation, as set forth in Section 1.401(m)-2(b) of the Treasury Regulations. In the event that multiple use of the alternative limitation occurs with respect to any Plan Year, then either the "highly compensated deferral percentage," as defined in Section 4.5 hereof, or the "highly compensated contribution percentage," as defined above, shall be reduced, such reduction and the Highly Compensated Employees to whom such reduction shall apply to be determined by the Committee in 23 29 accordance with Section l.401(m)-2(c) of the Treasury Regulations. If the above contribution percentage test would otherwise be violated as of the end of the Plan Year, then, subject to satisfaction of the conditions described in Section 1.401 (m)-l (b)(5) of the Treasury Regulations, the "contribution percentage," as defined in (a) above, shall instead be the ratio of the sum of the Employee's Company Matching Contributions and, to the extent necessary to satisfy the contribution percentage test, Salary Reduction Contributions and Qualified Nonelective Contributions, if any, for the applicable Plan Year to the Employee's compensation (as defined in Section 2.1(v) hereof) for the applicable Plan Year. Any Salary Reduction Contributions or Qualified Nonelective Contributions so utilized to satisfy the contribution percentage test shall be excluded from consideration for purposes of the deferral percentage test described in Section 4.5. If, after consideration of applicable Salary Reduction Contributions and Qualified Nonelective Contributions, if any, as described above, the contribution percentage test would still be violated as of the end of the Plan Year, then notwithstanding any other provision hereof, every Company Matching Contribution included in the "highly compensated contribution percentage" for a Participant whose contribution percentage is greater than the permitted maximum shall automatically be revoked to the extent necessary to comply with such contribution percentage test and the amount of such contribution, to the extent revoked, shall constitute an "excess aggregate contribution" to be distributed to such Participant (with earnings thereon) or forfeited, if applicable, no later than the last day of the Plan Year following the Plan Year for which such contribution was made. Excess aggregate contributions are allocated to the Highly Compensated Employees with the largest amounts of Employer contributions taken into account in calculating the contribution percentage test for the Plan Year in which the excess arose, beginning with the Highly Compensated Employee with the largest amount of such 24 30 Employer contributions and continuing in descending order until all excess aggregate contributions have been allocated. For purposes of the preceding sentence, the "largest amount" is determined after first determining required distributions under Section 4.4 hereof, and then determining excess contributions under Section 4.5. In the event there is a loss allocable to an excess aggregate contribution, any distribution to a Participant as required by this Section shall be no greater than the lesser of: (1) the value of the Participant's Company Matching Contribution Account or (2) the Participant's excess aggregate contribution for the Plan Year. If a Highly Compensated Employee participates in two (2) or more plans maintained by an Employer or any Affiliate that are subject to the contribution percentage test, then such Employee's contribution percentage shall be determined by aggregating his participation in all such plans. In addition, if an Employer maintains two (2) or more plans subject to the contribution percentage test and such plans are treated as a single plan for purposes of the requirements for qualified plans under either Section 410(b) or 401(a)(4) of the Code, then such plans are treated as a single plan for purposes of the contribution percentage test. 4.7 Rollover Contributions: Any Participant who is entitled to receive an eligible rollover distribution, as defined in Section 401(a)(31)(C) of the Code, may, in accordance with procedures approved by the Committee, elect to transfer directly to the Trustee, as a trustee-to-trustee transfer, in cash only, an amount equal to all or a portion of such distribution; provided that the maximum amount of such transfer shall be the fair market value of that portion of the distribution which would be includable in gross income if not so transferred (determined without regard to Section 402(c) of the Code). Any Participant who has had distributed to him an amount which qualifies as an eligible rollover distribution, as defined in Section 402(c)(4) of the Code, may, in accordance with procedures approved by the Committee, contribute cash only to 25 31 the Trust Fund in an amount equal to all or any portion of such distribution, provided the following conditions are met: (a) The contribution occurs on or before the 60th day following his receipt of such distribution or, if such distribution has previously been deposited in an individual retirement account (as defined in Section 408 of the Code), the contribution occurs on or before the 60th day following his receipt of such distribution from the individual retirement account; and (b) If the amount contributed has not previously been deposited in an individual retirement account, the maximum amount of such contribution shall be the fair market value of that portion of the distribution which would be includable in gross income if not so contributed. The Committee shall develop such procedures, and may require such information from a Participant desiring to make such a contribution or direct transfer, as it deems necessary or desirable to determine that the proposed contribution or transfer will meet the requirements of this Section 4.7. Upon approval by the Committee, the amount contributed or transferred shall be deposited in the Trust and shall be credited, as of the Valuation Date next following such contribution or transfer, to a Rollover Contribution Account for the Participant. An Employee in an eligible class to participate in the Plan, whether or not he has satisfied the eligibility conditions of the Plan, as set forth in Section 3.1 hereof, may make a Rollover Contribution to the Trust Fund to the same extent and in the same manner as a Participant. If such Employee makes a Rollover Contribution to the Trust Fund prior to satisfying the Plan's eligibility conditions, the Committee and Trustee shall treat the Employee as a Participant for all purposes of the Plan except for purposes of sharing in contributions until he actually becomes a 26 32 Participant. If the Employee terminates employment prior to becoming a Participant, the Trustee will distribute his Rollover Contribution Account to him in accordance with the provisions of Article XIII hereof, as if such Employee were a Participant of the Plan. Each Participant's or Employee's Rollover Contribution Account shall be 100% vested and nonforfeitable at all times, and shall share in asset adjustments pursuant to Section 5.2 herein, but shall not share in contributions. Upon termination of employment, the total amount of a Participant's Rollover Contribution Account shall be distributed in accordance with Article XIII hereof. 4.8 Prior Plan Employee Contributions: As of July 1, 2000, Prior Plan Employee Contributions shall be neither required nor permitted under this Plan. Prior Plan Employee Contributions which have previously been made shall at all times be fully vested and nonforfeitable, shall be credited to the Participant's Prior Plan Employee Contribution Account, shall in due course be included in the adjustment of Individual Accounts, as provided in Section 5.2, and shall share in the gains and losses of the Trust Fund. All Prior Plan Employee Contributions shall be invested in the Frozen Company Stock Fund, as provided in Section 14.5(c). 4.9 Prior Plan Employer Contributions: As of July 1, 2000, Prior Plan Employer Contributions shall be neither required nor permitted under this Plan. Prior Plan Employer Contributions which have previously been made shall at all times be fully vested and nonforfeitable, shall be credited to the Participant's Prior Plan Employer Contribution Account, shall in due course be included in the adjustment of Individual Accounts, as provided in Section 5.2, and shall share in the gains and losses of the Trust Fund. All Prior Plan Employer 27 33 Contributions shall be invested in the Frozen Company Stock Fund, as provided in Section 14.5(c). ARTICLE V Adjustment of Individual Accounts 5.1 Individual Accounts: The Committee shall establish an Individual Account for each Participant showing the monetary value of the individual interest in the Trust Fund of each Employee, former Employee and Beneficiary. The Individual Account of each Participant shall be composed of a Company Matching Contribution Account, to which Company Matching Contributions, if any, shall be credited and a Salary Reduction Contribution Account, to which Salary Reduction Contributions, if any, shall be credited, together with Company Matching Contributions, if any, utilized to satisfy the deferral percentage test or the contribution percentage test, as set forth in Sections 4.5 and 4.6 hereof. Qualified Nonelective Contributions, if any, contributed to satisfy the deferral percentage test or the contribution percentage test as set forth in Section 4.5 and 4.6 hereof, shall be credited to a Participant's Qualified Nonelective Contribution Account. If an individual has made either Prior Plan Employee Contributions or Rollover Contributions, or received Prior Plan Employer Contributions, then his Individual Account shall include a Prior Plan Employee Contribution Account, a Rollover Contribution Account and a Prior Plan Employer Contribution Account, as applicable. 5.2 Method of Adjustment: The Committee, or the Trustee or Investment Manager, as directed by the Committee, shall value the assets of the Trust Fund on each Valuation Date. In making such valuation, the Committee, or the Trustee, as the case might be, shall arrive at the fair market value of each investment fund in the Trust Fund. As of each Valuation Date, before any restoration of accounts as required pursuant to Section 13.3 hereof and before taking into 28 34 account the contributions of the Employer and forfeitures for the period since the last preceding Valuation Date, the Committee shall adjust all Individual Accounts as follows: (a) The Committee shall determine the market value of each investment fund in the Trust Fund, including the effect of expenses of administration and other charges against such fund since the last Valuation Date. (b) The Committee shall determine the total aggregate value of all Individual Accounts participating in the investment fund as shown in its records as of the prior Valuation Date. The Individual Account balances of Employees, former Employees and Beneficiaries shall be reduced by any amounts paid to them from the investment fund since the last Valuation Date. (c) The Committee shall then adjust the value of each Individual Account participating in the investment fund by crediting each Individual Account with its proportion of the difference between (a) and (b) if (a) is the larger or charging it with its proportion of the difference between (a) and (b) if (b) is larger; the proportion to be so credited or charged to each Individual Account shall be calculated by multiplying the difference between (a) and (b) by a fraction, the numerator of which is the value of said Individual Account and the denominator of which is the aggregate value of all Individual Accounts. 5.3 Payroll Withholding Agreements: Each Participant who elects to make Salary Reduction Contributions shall enter into a payroll withholding agreement between the Participant and the Employer, to be effective as of the first day of the first payroll period for which he elects Salary Reduction Contributions. Such agreement must be made prior to the first day of such 29 35 payroll period, and shall be effective for each payroll period thereafter until modified or amended, as provided below. The terms of such agreement shall provide that the Participant agrees to have the Employer withhold from his compensation each payroll period an amount, expressed as any whole percentage of his Annual Compensation which does not exceed the limitations of Article IV. In consideration of such agreement, the Employer will make a contribution to the Trust Fund on behalf of the Participant for each payroll period in an amount equal to the total amount by which the Participant's Annual Compensation from the Employer was reduced during such payroll period pursuant to the payroll withholding agreement. In the event that a payroll withholding agreement for a Participant is not received, the Participant is deemed to have completed a payroll withholding agreement in accordance with Section 4.1. Notwithstanding the above, payroll withholding agreements shall be governed by the following general guidelines: (a) A payroll withholding agreement shall apply to each payroll period during which an effective agreement is in place. Upon termination of employment, such agreement will become void. (b) A Participant may revoke his payroll withholding agreement at any time upon reasonable advance notice to the Committee, and thus discontinue all future withholding thereafter. A resumption of withholding following the revocation of a payroll withholding agreement may be made only upon advance notice to the Committee, within the time period established and in the manner prescribed by the Committee, such notice to be in the form of a new payroll withholding agreement, and shall be effective as of the first day of the first full payroll period beginning thereafter. A Participant may 30 36 increase the percentage to be withheld from his Annual Compensation or decrease the percentage to be withheld from his Annual Compensation upon reasonable advance notice to the Committee, such increase or decrease to be effective as of the first full payroll period beginning thereafter. Any revocation of or change in the terms of a payroll withholding agreement shall be made in the manner prescribed by the Committee. (c) An Employer may unilaterally amend or revoke a payroll withholding agreement with any Participant at any time, if the Employer determines that such revocation or amendment is necessary to insure that a Participant's Annual Additions, as defined in Section 6.6(b) hereof, for any Plan Year will not exceed the limitations of Article VI or to insure that the requirements of Section 401(k) of the Code have been satisfied with respect to the amount which may be withheld and contributed on behalf of a Highly Compensated Employee. ARTICLE VI ALLOCATIONS 6.1 Salary Reduction and Rollover Contributions: Salary Reduction Contributions shall be credited to the Salary Reduction Contribution Accounts of Participants and former Participants, as of the Valuation Date coinciding with the date on which Salary Reduction Contributions are received by the Trust Fund, or as soon thereafter as administratively feasible, in accordance with each Participant's or former Participant's payroll withholding agreement. Rollover Contributions shall be credited to the Individual Accounts of Participants and Employees as provided in Section 4.7 hereof. 6.2 Company Matching Contributions: Company Matching Contributions for the period ending on the last day of each month shall be credited to the Company Matching 31 37 Contribution Accounts of all eligible Participants as of the Valuation Date coinciding with the date on which Company Matching Contributions are received by the Trust Fund or as soon thereafter as administratively feasible. The amount of the Company Matching Contribution, if any, allocated to the Company Matching Contribution Account of each eligible Participant shall be that percentage of such eligible Participant's Salary Reduction Contributions specified by the board of directors of the Company in accordance with Section 4.2. 6.3 Qualified Nonelective Contributions: As of each Allocation Date, but after any adjustment of Individual Accounts, as provided in Section 5.2, and other applicable provisions herein, the Committee shall allocate Qualified Nonelective Contributions, if any, for the Plan Year ending with said Allocation Date to the Qualified Nonelective Contribution Accounts of all Participants who are not Highly Compensated Employees for the Plan Year, except those Participants who terminated employment prior to the Allocation Date. The amount of the contribution allocated under this Section 6.3 to the Qualified Nonelective Contribution Account of each such Participant shall be in the proportion that his Annual Compensation bears to the total Annual Compensation of all such Participants. 6.4 Allocation of Forfeitures: If a Participant forfeits a portion of his Individual Account as provided in Section 10.3 hereof, then said forfeited amount shall be used first to restore the Individual Accounts of rehired Participants, as required under Section 13.3 hereof. Any remaining forfeitures shall be utilized to reduce the Employer's obligation, if any, to make Company Matching Contributions pursuant to the terms of the Plan. If a Participant who does not have any nonforfeitable right to his Individual Account terminates his employment and thereby forfeits his Individual Account, then in the event such Participant is re-employed before he has incurred five (5) or more consecutive Breaks in Service, his Individual Account which 32 38 was forfeited shall again be credited to his account by his Employer at the time of his re-employment. 6.5 Notification to Participants: At least annually, the Committee shall advise each Participant, former Participant and Beneficiary for whom an Individual Account is held hereunder of the then balance in such account. 6.6 Maximum Annual Addition to Account or Benefit: (a) Where Employer Maintains Another Qualified Defined Contribution Plan: If an Employer maintains, or has ever maintained, this Plan and one or more other qualified defined contribution plans, the Annual Additions allocated under this Plan to any Participant's Individual Account shall be limited in accordance with the allocation provisions of this Section 6.6(a). The amount of the Annual Additions which may be allocated under this Plan to any Participant's Individual Account as of any Allocation Date shall not exceed the Maximum Permissible DC Amount (based upon compensation up to such Allocation Date) reduced by the sum of any allocations of Annual Additions made to the Participant's Individual Account under this Plan and any other such plans maintained by the Employer as of any preceding allocation date within the Limitation Year. If an Allocation Date of this Plan coincides with an allocation date of any other plan described in the above paragraph, the amount of Annual Additions to be allocated on behalf of a Participant under this Plan as of such date shall be an amount equal to the product of the amount described in the next preceding paragraph multiplied by a fraction (not to exceed 1.0), the numerator of which is the amount to be allocated under this Plan without regard to this Article during the Limitation Year and the denominator of which is 33 39 the amount that would otherwise be allocated on this Allocation Date under all plans without regard to this Section 6.6. If the Annual Addition allocated on behalf of a Participant under this Plan is to be reduced as of any Allocation Date as a result of exceeding the limitations described in the next preceding two paragraphs, such reduction shall be, to the extent required, effected by first reducing Salary Reduction Contributions, and earnings attributable thereto, and then by reducing any Company Matching Contributions to be allocated under this Plan on behalf of such Participant as of such Allocation Date. If as a result of the first four paragraphs of this Section 6.6(a) the allocation of Annual Additions is reduced, such reduction shall be made as follows: (i) To the extent permitted under applicable Treasury Regulations, the amount of such reduction consisting of Salary Reduction Contributions, and earnings attributable thereto, shall be paid to the Participant as soon as administratively feasible. (ii) The amount of such reduction consisting of Company Matching Contributions shall be allocated and reallocated to the Individual Accounts of the other Participants in the proportion that each Participant's compensation bears to the total compensation of all such Participants' compensation for such Plan Year to the extent that such allocations do not cause the Annual Additions to any such other Participant's Individual Account to exceed the lesser of the Maximum Permissible DC Amount or any other limitation provided in the Plan. 34 40 (b) Definitions Applicable to Section 6.6. (i) Annual Additions: Annual Additions are the sum of the following amounts allocated on behalf of a Participant for a Limitation Year: (1) all Company Matching Contributions; (2) all forfeitures, if applicable; (3) all Salary Reduction Contributions; and (4) amounts allocated after March 31, 1984, to an individual medical account, as defined in Section 415(l)(2) of the Code which is part of a pension or annuity plan maintained by the Employer, and amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Section 419(d)(3) of the Code) under a welfare benefit plan (as defined in Section 419(e) of the Code) maintained by the Employer. The Annual Additions for any Limitation Year beginning before January 1, 1987, shall not be recomputed to treat all Prior Plan Employee Contributions as Annual Additions. (ii) Employer: Employer shall mean, in addition to an Employer (as defined in Section 2.1(r) hereof), any and all Affiliates of an Employer. (iii) Limitation Year: The Limitation Year shall be the twelve (12) consecutive month period ending on the last day of June or any other twelve (12) 35 41 consecutive month period for all qualified plans of an Employer pursuant to a written resolution the Employer adopts. (c) Maximum Permissible DC Amount: The Maximum Permissible DC Amount for a given Limitation Year is equal to the lesser of (i) 25% of compensation for the Limitation Year (as defined in Section 2.1(v) hereof, but, for Limitation Years ending prior to July 1, 1998, excluding contributions made by the Employer pursuant to a salary reduction agreement under a plan subject to Section 401(k) or 125 of the Code) applicable to such Limitation Year or (ii) $30,000, as adjusted. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different twelve (12) consecutive month period, the $30,000 referred to in the previous sentence is multiplied by a fraction, the numerator of which is equal to the number of months in the short Limitation Year and the denominator of which is 12. ARTICLE VII RETIREMENT 7.1 Normal or Late Retirement: A Participant, upon reaching his Normal Retirement Date for the purposes of this Plan, shall be entirely vested in his Individual Account and such amount contained therein shall be nonforfeitable. If a Participant continues in the employment of an Employer beyond his Normal Retirement Date, he shall continue to participate in the Plan. 7.2 Benefit: Upon Retirement (whether normal or late Retirement in accordance with Section 7.1), a Participant shall be entitled to the entire amount to the credit of his Individual Account as of the Valuation Date concurrent with or next preceding his date of Retirement, together with his portion, if any, of Salary Reduction Contributions and Company Matching Contributions allocated after his date of Retirement, adjusted for earnings and losses, if any, 36 42 which accrue to the Valuation Date immediately preceding the date of distribution, if later. Upon his Retirement under this Article VII, a Participant shall receive the benefits to which he is entitled at the time and in the manner provided in Article XIII hereof. ARTICLE VIII DEATH 8.1 Designation of Beneficiary: Each Participant and former Participant may, from time to time, designate one or more Beneficiaries and alternate Beneficiaries to receive benefits pursuant to this Article in the event of the death of such Participant or former Participant. Such designation shall be made in writing upon a form provided by the Committee and shall only be effective when filed with the Committee. The last such designation filed with the Committee shall control. If a Participant is married, his spouse shall automatically be his Beneficiary; provided, however, a Beneficiary other than his spouse may be designated if (a) his spouse consents in writing to such designation, the consent acknowledges the effect of such designation and the designation is witnessed by a member of the Committee or a notary public, or (b) it is established to the satisfaction of the Committee that there is sufficient reason why the consent may not be obtained. 8.2 Benefit: Upon the death of a Participant or former Participant, his designated Beneficiary or Beneficiaries shall be entitled to the entire vested amount to the credit of his Individual Account as of the Valuation Date concurrent with or next preceding his date of death, together with his portion, if any, of Salary Reduction Contributions and Company Matching Contributions allocated after his date of death, adjusted for earnings and losses, if any, which accrue to the Valuation Date immediately preceding the date of distribution, if later. Payment shall be made at the time and in the manner provided in Article XIII hereof. 37 43 8.3 No Beneficiary: If a Participant or former Participant dies without a designated Beneficiary surviving him, or if all his Beneficiaries die before receiving the payment to which they are entitled, then the Committee is hereby empowered to designate a Beneficiary or Beneficiaries on his behalf, but only from among the following with priority in the order named by number which shall include persons legally adopted: (a) his spouse; (b) his children and children of deceased children, per stirpes (by right of representation); (c) his parents; (d) his brothers and sisters, and nephews and nieces who are children of deceased brothers and sisters, per stirpes (by right of representation); and (e) his legal representative properly appointed by the appropriate court upon his death. Neither the Employer nor the Trustee shall be named as Beneficiary. For the purpose of this Plan, the production of a certified copy of the death certificate of any Employee or other person shall be sufficient evidence of death, and the Committee shall be fully protected in relying thereon. In the absence of such proof, the Committee may rely upon such other evidence of death as it deems necessary or advisable. ARTICLE IX DISABILITY 9.1 Benefit: In the event of the Disability of a Participant, he shall be entitled to the entire vested amount to the credit of his Individual Account as of the Valuation Date concurrent with or next preceding the date on which his employment terminates as a result of his Disability, 38 44 together with his portion, if any, of Salary Reduction Contributions and Company Matching Contributions allocated after the date of his termination of employment, adjusted for earnings and losses, if any, which accrue to the Valuation Date immediately preceding the date of distribution, if later. Payments shall be made at the time and in the manner provided in Article XIII hereof. A Participant who suffers a Disability who has not terminated employment may request an in-service withdrawal in accordance with Section 13.10 hereof. ARTICLE X TERMINATION OF EMPLOYMENT AND FORFEITURES 10.1 Eligibility and Benefits: If a Participant's employment with his Employer and all Affiliates shall terminate for any reason other than his Retirement under Article VII, death under Article VIII, or Disability under Article IX, such Participant shall be entitled to the entire amount to the credit of his Salary Reduction Contribution Account, Prior Plan Employee Contribution Account, Prior Plan Employer Contribution Account, Rollover Contribution Account and Qualified Nonelective Contribution Account and to a percentage of the amount in his Company Matching Contribution Account as of the Valuation Date coincident with or next preceding the date of such termination, together with his portion, if any, of Salary Reduction Contributions and Company Matching Contributions allocated after the date of his termination of employment, adjusted for earnings and losses, if any, which accrue to the Valuation Date immediately preceding the date of distribution, if later. The percentage of such amount in his Company Matching Contribution Account to which he is entitled shall be determined in accordance with the following schedule: 39 45
Percentage Completed Years of Service Payable -------------------------- ---------- 1 year but less than 2 years 33% 2 years but less than 3 years 67% 3 years or more 100%
The provisions of this Section 10.1 shall be subject to the provisions of Section 15.3 hereof, which shall be given full effect. Notwithstanding the foregoing, each Participant in the Plan who was a Participant in the Prior Plan on or before June 30, 2000 shall be 100% vested in his Company Matching Contribution Account under the Plan. 10.2 Time of Payment: The amount to which a Participant shall be entitled under Section 10.1 shall be paid to him at the time and in the manner provided in Article XIII hereof. 10.3 Forfeitures: A Participant to whom Section 10.1 is applicable shall forfeit that portion of the amount in his Individual Account to which he is not entitled under Section 10.1 and the amount thus forfeited shall remain in the Trust Fund and shall be allocated pursuant to the provisions of Section 6.4. A Participant who does not have any nonforfeitable right to his Individual Account shall be deemed to have received a cashout distribution pursuant to Section 13.3 hereof, and shall forfeit the amount in such Individual Account in the Plan Year in which his termination of employment occurs. A Participant who receives a cashout distribution in accordance with the provisions of Section 13.3 hereunder shall forfeit that portion of his Individual Account to which he is not entitled under Section 10.1 in the Plan Year in which the cashout distribution occurs. A Participant who is entitled to a portion of his Individual Account but who is not one hundred percent (100%) vested in such Individual Account, and who does not receive a cashout distribution under Section 13.3, shall forfeit that portion of his Individual Account to which he is not entitled under Section 10.1 in the Plan Year in which he incurs five (5) consecutive Breaks in Service. 40 46 ARTICLE XI ADMINISTRATION 11.1 Appointment of Committee: The Plan shall be administered by a committee known as the "Administrative Committee," hereinafter referred to as the "Committee" consisting of at least one or more persons who shall be appointed by and serve at the pleasure of the board of directors of the Company. At least one of the members of the Committee shall be an outside director on the board of directors of the Company. All usual and reasonable expenses of the Committee may be paid in whole or in part by the Employer, and any expenses not paid by the Employer shall be paid by the Trustee out of the principal or income of the Trust. The members of the Committee shall not receive compensation with respect to their services for the Committee; provided, however, that any member of the Committee who is an outside director on the board of directors of the Company shall be paid usual and reasonable director's committee fees by the Company. The members of the Committee shall serve without bond or security for the performance of their duties hereunder unless the applicable law makes the furnishing of such bond or security mandatory or unless required by the Company. Each member of the Committee shall hold office until his death, disability, resignation or removal from office. Any member of the Committee may be removed by the Company at its pleasure. Any member may resign by delivering his written resignation to the Company and to the other members of the Committee. 11.2 Committee Powers and Duties: The Committee shall have such powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers and duties: 41 47 (a) to construe and interpret the Plan, decide all questions of eligibility and determine the amount, manner and time of payment of any benefits hereunder; (b) to prescribe procedures to be followed by distributees in obtaining benefits; (c) to make a determination as to the right of any person to a benefit and to afford any person dissatisfied with such determination the right to a hearing thereon; (d) to receive from the Employer and from Participants such information as shall be necessary for the proper administration of the Plan; (e) to delegate to one or more of the members of the Committee or the Plan Administrator the right to act in its behalf in all matters connected with the administration of the Plan and Trust; (f) to receive and review reports of the financial condition and of the receipts and disbursements of the Trust Fund from the Trustee; (g) to appoint or employ for the Plan any agents it deems advisable, including, but not limited to, legal counsel; and (h) to take any and all further actions from time to time as the Committee, in its sole and absolute discretion, shall deem necessary for the proper administration of the Plan. The Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any requirements of eligibility for benefits under the Plan. The Committee shall have full and absolute discretion in the exercise of each and every aspect of its 42 48 authority under this Plan, including without limitation, all of the rights, powers and authorities specified in this Section 11.2 and, if applicable, in Section 11.3 hereof. A majority of the members of the Committee shall constitute a quorum for the transaction of business. No action shall be taken except upon a majority vote of the Committee members. Except when there is only one member of the Committee, an individual shall not vote or decide upon any matter relating solely to himself or vote in any case in which his individual right or claim to any benefit under the Plan is particularly involved. If, in any case in which a Committee member is so disqualified to act, and the remaining members cannot agree, the board of directors of the Company will appoint a temporary substitute member to exercise all the powers of the disqualified member concerning the matter in which he is disqualified. 11.3 Duties and Powers of the Plan Administrator: The Plan Administrator shall have such powers as may be necessary to discharge his duties hereunder, including, but not by way of limitation, the following powers and duties: (a) to file with the Secretary of Labor the annual report, plan description, summary plan description, and other pertinent documents which may be requested by the Secretary; (b) to file with the Secretary of Labor such terminal and supplementary reports as may be necessary in the event of the termination of the Plan; (c) to furnish each Participant and each Beneficiary receiving benefits hereunder a summary plan description explaining the Plan; 43 49 (d) to furnish any Participant or Beneficiary, who requests in writing, statements indicating such Participant's or Beneficiary's total accrued benefits and nonforfeitable benefits, if any; (e) to furnish to a Participant a statement containing information contained in a registration statement required by Section 6057(a)(2) of the Code; (f) to maintain all records necessary for verification of information required to be filed with the Secretary; (g) to allocate the assets of the Plan available to provide benefits to Participants in the event the Plan should terminate; and (h) to report to the Trustee all available information regarding the amount of benefits payable to each Participant, the amount of benefits guaranteed, the computations with respect to the allocation of assets, and any other information which the Trustee may require in order to terminate the Plan. 11.4 Rules and Decision: The Committee may adopt such rules as it deems necessary or desirable. All rules and decisions of the Committee shall be uniformly and consistently applied to all Employees in similar circumstances. The Committee is required to provide a notice in writing to any person whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial. The Committee shall adopt rules or procedures to carry out the intent of this Section and to provide a basis for a full and fair review by the Committee of the decision denying the claim and provide such person with an opportunity to supply any evidence he has to sustain the claim. 11.5 Committee Procedures: The Committee shall adopt such bylaws as it deems desirable. The Committee shall elect one of its members as chairman and shall elect a secretary 44 50 who may, but need not, be a member of the Committee. The Committee shall advise the Trustee of such elections in writing. The Secretary of the Committee shall keep a record of all meetings and forward all necessary communications to the Trustee. 11.6 Authorization of Benefit Payments: The Committee shall issue directions to the Trustee concerning all benefits which are to be paid from the Trust Fund pursuant to the provisions of the Plan. The Committee shall keep on file, in such manner as it may deem convenient or proper, all reports from the Trustee. 11.7 Payment of Expenses: All expenses incident to the administration or protection of the Plan and Trust, including but not limited to, actuarial, legal, accounting, and Trustee's fees, shall be paid by the Employer, or if not paid by the Employer, shall be paid by the Trustee from the Trust Fund and, until paid, shall constitute a first and prior claim and lien against the Trust Fund. 11.8 Indemnification of Members of the Committee: The Company shall indemnify the members of the Committee against any liability or loss sustained by them by any act or failure to act in their capacity as members of the Committee, unless the same is judicially determined to be due to the gross negligence, willful misconduct or willful failure to act of such member. Such indemnification shall include attorney's fees reasonably incurred by such members of the Committee in defense of any action brought against them by reason of any such act or failure to act. ARTICLE XII NOTICES 12.1 Notice to Trustee: As soon as practicable after a Participant ceases to be in the employ of an Employer for any of the reasons set forth in Articles VII through X, inclusive, the 45 51 Committee shall give notice to the Trustee, which notice shall include such of the following information and directions as are necessary or advisable under the circumstances: (a) name and address of the Participant; (b) reason Participant ceased to be in the Employer's employ; (c) name and address of the Beneficiary or Beneficiaries in case of a Participant's death; (d) percentage or amount to which Participant is entitled in case of termination of employment pursuant to Article X; (e) time, manner and amount of payments to be made pursuant to Article XIII. If a former Participant dies, the Committee shall give a like notice to the Trustee, but only if the Committee learns of his death. 12.2 Subsequent Notices: At any time and from time to time after giving the notice as provided for in Section 12.1, the Committee may modify such original notice or any subsequent notice by means of a further notice or notices to the Trustee; but, any action taken or payments made by the Trustee pursuant to a prior notice shall not be affected by a subsequent notice. 12.3 Reliance upon Notice: Upon receipt of any notice as provided in this Article, the Trustee shall promptly take whatever action and make whatever payments are called for therein, it being intended that the Trustee may rely upon the information and directions in such notice absolutely and without question. However, the Trustee may call to the attention of the Committee any error or oversight which the Trustee believes to exist in any notice. 46 52 ARTICLE XIII DISTRIBUTIONS, WITHDRAWALS AND LOANS 13.1 Method of Payment: As soon as practicable after a Participant, former Participant or Beneficiary is entitled to receive benefits hereunder, as provided in Articles VII, VIII, IX, X or this Article XIII, the Committee shall give notice to the Trustee. Subject to Section 13.5 hereof, the Committee shall direct that such benefits shall be paid to the Participant or his Beneficiary in one of the following ways, or in any combination thereof, as such Participant or Beneficiary shall direct: (a) lump sum, payable in cash or in Company Stock, or partly in cash and partly in Company Stock, where applicable; (b) payment in monthly installments over any designated period of years, not to exceed ten (10) years, or, if shorter, the life expectancy of the Participant, or the joint life expectancy of the Participant and his designated beneficiary, with any unpaid balance at the date of the Participant's death to be payable to the surviving beneficiary designated by such Participant. If a Participant's interest is to be distributed in other than a lump sum, then the amount to be distributed each year must be at least an amount equal to the quotient obtained by dividing the Participant's entire interest by the life expectancy of the Participant or the joint life expectancy of the Participant and his designated Beneficiary. The minimum distribution shall be computed by reference to the expected return multiples in Tables V and VI of Treasury Regulation Section 1.72--9. For purposes of this computation, a Participant's life expectancy, and that of his spouse, may be redetermined, no more frequently than annually, as provided below; however, the life expectancy of a nonspouse Beneficiary may not be recalculated. Unless otherwise elected 47 53 by the Participant or, if applicable, his spouse, by the time distributions are required to begin, life expectancies shall not be recalculated. If such an election is timely made, then applicable life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant and, if applicable, his spouse, and shall apply to all subsequent years. Life expectancy or, if applicable, joint and last survivor expectancy shall be calculated using the attained age of the Participant and, if applicable, that of his designated Beneficiary as of the Participant's and, if applicable, the designated Beneficiary's birthday in the first calendar year for which a distribution is required, reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated; provided that if life expectancy is being recalculated, as described above, the applicable life expectancy shall be life expectancy as so recalculated. For calendar years beginning before January 1, 1989, if the Participant's spouse is not the designated Beneficiary, the method of distribution selected must assure that at least 50% of the present value of the total amount available for distribution is paid within the life expectancy of the Participant. For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first calendar year for which a minimum distribution is required, shall not be less than the quotient obtained by dividing the Participant's benefit by the applicable life expectancy or, if the Participant's spouse is not the designated Beneficiary, by the lesser of the applicable life expectancy or the applicable divisor determined from the table set forth in Q&A-4 of Section 1.401 (a)(9)-2 of the Treasury Regulations; provided that distributions after the death of the Participant shall be distributed using the applicable life expectancy as the relevant divisor. 13.2 Time of Payment: After a Participant, former Participant, former Participant or Beneficiary is entitled to receive benefits hereunder, as provided in Articles VII, VIII, IX or X, 48 54 benefits shall commence for such Participant or Beneficiary, subject to the requirements herein, as soon as practicable following receipt by the Committee of the Participant's or Beneficiary's request for distribution. In the event that the vested portion of a Participant's Individual Account does not exceed Five Thousand and No/l00 Dollars ($5,000.00), distribution of such Participant's benefits shall be made in a lump sum as soon as reasonably practicable following the Participant's termination of employment. In the event that the vested portion of a Participant's Individual Account exceeds (or at the time of any prior distribution exceeded) Five Thousand and No/100 Dollars ($5,000.00), no distributions may commence without the Participant's written consent, as described below, until the Participant attains his Normal Retirement Age. Such consent must be obtained in writing within the ninety (90) day period ending on the date of distribution. The Committee shall notify the Participant of the right to defer any distribution until he attains Normal Retirement Age. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code, and shall be provided no less than thirty (30) days and no more than ninety (90) days prior to the date of distribution. Notwithstanding the foregoing, the consent of the Participant shall not be required to the extent that a distribution is required to satisfy Section 415 or Sections 401(k)(8) or 401(m)(6) of the Code. In addition, upon termination of this Plan if the Plan does not then offer an annuity option, the Participant's Individual Account may, without the consent of the Participant, be distributed to the Participant or transferred to another defined contribution plan within the same controlled group, as defined in Section 4 14(b) or (c) of the Code. Furthermore, if a distribution is one to which Sections 401(a)(l1) and 417 of the Code do not apply, such distribution may commence less than thirty (30) days after the notice required 49 55 under Section 1.411(a)-11(c) of the Treasury Regulations is given, provided that: (a) the Committee clearly informs the Participant that he has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (b) the Participant, after receiving the notice, affirmatively elects a distribution. Distributions shall commence no later than the required beginning date, which, effective January 1, 1997, is April 1st of the calendar year following the later of: (i) the calendar year in which the Participant attains age 70 1/2, or (ii) the calendar year in which the participant retires; provided that if a Participant is a Five Percent (5%) Owner (as defined in Section 17.1(g) hereof), then the required beginning date is April 1st of the calendar year following the calendar year in which such Participant attains age 70 1/2. The minimum distribution required for the calendar year immediately preceding the Participant's required beginning date must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the calendar year in which the Participant's required beginning date occurs, must be made on or before December 31 of such calendar year. All minimum distributions required under this Article XIII shall be determined and made in accordance with the applicable Treasury Regulations under Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of Section l.401(a)(9)-2 of the Treasury Regulations. Notwithstanding any provision herein to the contrary, any Participant who attains age 70 1/2 in a calendar year after 1995 and prior to 1999, may irrevocably elect, in the manner established by the Committee, by April 1 of the calendar year following the year in which the Participant attains age 70 1/2 (or by December 31, 1997 in the case of a Participant who attains age 50 56 70 1/2 in 1996) to defer distributions until April 1 of the calendar year following the calendar year in which the Participant retires. If no such election is made, the Participant will begin receiving distributions by the April 1 of the calendar year following the year in which the Participant attains age 70 1/2 (or by December 31, 1997 in the case of a Participant who attains age 70 1/2 in 1996). Furthermore, any Participant who attains age 70 1/2 in a calendar year prior to 1996, may irrevocably elect, in the manner established by the Committee, to stop distributions and recommence distributions as of the April 1 of the calendar year following the calendar year in which such Participant retires. In such event, there shall be no new annuity starting date upon such recommencement. Finally, any Participant who attains age 70 1/2 in a calendar year after 1998 shall have an affirmative election to irrevocably commence distributions hereunder at any time thereafter, in the manner established by the Committee, and in a method of payment set forth in Section 13.1. If distributions have commenced so that payments are being made over the life of the Participant, and the Participant dies before his entire interest has been distributed, then the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution being used as of the date of his death. On the other hand, if the Participant dies before the distribution of any of his benefits has begun, then the entire interest of the Participant must be distributed no later than December 31 of the calendar year containing the fifth anniversary of his death; except that if any portion of the Participant's interest is payable to a designated Beneficiary, such portion may be distributed over the life of such designated Beneficiary (or over a period not extending beyond the life expectancy of such Beneficiary); provided that such distribution must begin not later than December 31 of the calendar year immediately following the calendar year of the Participant's death. If the designated Beneficiary 51 57 is the Participant's surviving spouse and such surviving spouse dies after the Participant, but before payments to such surviving spouse begin, then the provisions of the preceding sentence shall be applied as if the surviving spouse were the Participant. Furthermore, if the designated Beneficiary is the surviving spouse of the Participant, then distribution to such surviving spouse will not be required to begin earlier than the later of: (1) December 31 of the calendar year immediately following the calendar year of the Participant's death and (2) December 31 of the calendar year in which the Participant would have attained age 70 1/2. If the Participant has not elected, prior to his death, which method of distribution will apply to determine the commencement and period of payment, as described above, then the designated Beneficiary must elect such method no later than the earlier of (A) December 31 of the calendar year in which distributions would be required to begin under the preceding provisions of this paragraph, or (B) December 31 of the calendar year which contains the fifth anniversary of the Participant's date of death. If the Participant has no designated Beneficiary, or if the designated Beneficiary does not elect such method, distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. Distribution of a Participant's benefits is considered to have begun, for purposes of this paragraph, on the Participant's required beginning date; provided that if the Participant's designated Beneficiary is his surviving spouse, and such surviving spouse dies after the Participant but before payments to such surviving spouse have begun, then distribution of benefits is considered to have begun on the date distribution to the surviving spouse is required to begin pursuant to the provisions of this paragraph. For purposes of applying these rules in the event of the Participant's death, the expected return multiples in Tables V and VI of Treasury Regulation Section 1.72-9 shall be utilized. The life expectancy of a surviving spouse may be 52 58 recalculated annually as provided in Section 13.1 hereof; however, in the case of any other designated Beneficiary, such life expectancy may not be recalculated. Any amount paid to the child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable when the child reaches the age of majority. Unless the Participant elects otherwise, in writing, no distribution hereunder shall start later than 60 days after the close of the Plan Year in which the last to occur of the following occurs: (a) the Participant attains the age of 65 years, (b) the 10th anniversary of the year in which the Participant commenced participation in the Plan, or (c) the Participant terminates service with the Employer and all Affiliates. Notwithstanding the preceding paragraph, a distribution on behalf of any Participant or Beneficiary may be made in accordance with a designated distribution designation executed prior to January 1, 1984. The Trustee shall not distribute pursuant to a pre-1984 distribution designation if any of the following apply: (i) the distribution is one which would have disqualified the Plan and Trust under Section 401(a)(9) of the Code as in effect on December 31, 1983; (ii) the Participant did not have a balance in his Individual Account as of December 31, 1983; (iii) the pre-1984 distribution designation did not specify the time at which distribution will commence, the period over which distribution shall be made, and the death Beneficiaries in order of priority; (iv) the substitution of a Beneficiary alters the distribution period; or (v) the Participant or Beneficiary modifies or revokes the pre-1984 distribution designation. If a designation is revoked, any subsequent distribution must satisfy the requirements of Section 401 (a)(9) of the Code and the Treasury Regulations thereunder. If a designation is revoked subsequent to a Participant's required beginning date, as defined above, the Plan must 53 59 distribute by the end of the calendar year following the calendar year in which the revocation occurs, the total amount which would have been required to have been distributed to satisfy Section 401(a)(9) of the Code and Treasury Regulations thereunder, but for the pre-1984 election. For calendar years beginning after December 31, 1988, such distribution must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of the Treasury Regulations. 13.3 Cash Out Distribution. If a Participant or former Participant who has received a distribution of his benefits hereunder on or before the last day of the second Plan Year following the year in which his termination of employment occurs has forfeited a portion of his Individual Account, then in the event such Participant or former Participant is subsequently rehired by the Employer prior to the date on which he incurs five (5) consecutive Breaks in Service, he shall be entitled to repay, at any time prior to the earlier of: (a) the date which is five (5) years after the first date on which he is subsequently re-employed by the Employer and (b) the date on which he incurs five (5) consecutive Breaks in Service, the amount of the distribution to him from his Individual Account. Upon such repayment, the rehired Participant's Individual Account shall be credited with the exact amount which was nonvested at the time of termination. In the event a rehired Participant who has received a distribution hereunder does not timely repay such distribution from his Individual Account, as provided above, then the amount he forfeited at the time of his termination of employment pursuant to the terms of Section 10.3 herein shall remain forfeited. His prior Years of Service shall be taken into account, however, for purposes of determining his vested interest in contributions following re-employment. If a Participant who does not have any nonforfeitable right to his Individual Account and thus is deemed to have received a cashout distribution, pursuant to the provisions of Section 10.3 hereof, is subsequently 54 60 re-employed by the Employer and five (5) consecutive Breaks in Service have not occurred, then upon such re-employment, the rehired Participant's Individual Account shall be credited with the exact amount which was nonvested at the time of termination. 13.4 Minority or Disability Payments: During the minority or Disability of any person entitled to receive benefits hereunder, the Committee may direct the Trustee to make payments due such person directly to him or to his spouse or a relative or to any individual or institution having custody of such person. Neither the Committee nor the Trustee shall be required to see to the application of payments so made, and the receipt of the payee (including the endorsement of a check or checks) shall be conclusive as to all interested parties. 13.5 Distributions Under Domestic Relations Orders: Nothing contained in this Plan shall prevent the Trustee, in accordance with the direction of the Committee, from complying with the provisions of a qualified domestic relations order (as defined in Section 414(p) of the Code). The Plan specifically permits distribution to an alternate payee under a qualified domestic relations order at any time, irrespective of whether the Participant has attained his earliest retirement age under the Plan, as defined in Section 414(p) of the Code. A distribution to an alternate payee prior to the Participant's attainment of earliest retirement age is available only if: (a) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; (b) the order specifies such distribution to be in the form of a single, lump sum payment; and (c) if the amount to which the alternate payee is entitled under the Plan exceeds $5,000, and the order so requires, the alternate payee consents to any distribution occurring prior to the Participant's attainment of earliest retirement age. Nothing in this Section 13.5 gives a Participant a right to receive distribution at a time otherwise not 55 61 permitted under the Plan nor does it permit the alternate payee to receive a form of payment not otherwise permitted under the Plan. The Plan Administrator shall establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator shall promptly notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Plan Administrator shall determine the qualified status of the order and shall notify the Participant and each alternate payee, in writing, of its determination. The Plan Administrator shall provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations. The Plan Administrator may treat as qualified any domestic relations order entered prior to January 1, 1985, irrespective of whether it satisfies all the requirements described in Section 414(p) of the Code. If any portion of the Participant's Individual Account is payable during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order, the Committee shall direct the Trustee to segregate the amounts that are payable into a separate account and to invest the segregated account solely in fixed income investments. If the Plan Administrator determines the order is a qualified domestic relations order within eighteen (18) months of receiving the order, the Committee shall direct the Trustee to distribute the segregated account in accordance with the order. If the Plan Administrator does not make its determination of the qualified status of the order within eighteen (18) months after receiving the order, the Committee shall direct the Trustee to distribute the segregated account in the manner 56 62 the Plan would distribute it if the order did not exist and shall apply the order prospectively if the Plan Administrator later determines the order is a qualified domestic relations order. To the extent it is not inconsistent with the provisions of the qualified domestic relations order, the Committee may direct the Trustee to invest any amount that is subject to being paid to an alternate payee pursuant to said order into a segregated subaccount or separate account and to invest the account in federally insured, interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated subaccount shall remain a part of the Trust, but it alone shall share in any income it earns, and it alone shall bear any expense or loss it incurs. The Trustee shall make any payments or distributions required under this Section 13.5 by separate benefit checks or other separate distribution to the alternate payee(s). 13.6 Direct Rollover of Eligible Rollover Distributions: An individual who is entitled to a benefit hereunder, the distribution of which would qualify as an eligible rollover distribution (as defined in Section 401(a)(31)(C) of the Code) may, in lieu of receiving any payment or payments from the Plan, direct the Trustee to transfer all of such payment or payments directly to the trustee of an eligible retirement plan (as defined in Section 401 (a)(31)(D) of the Code). Such election must be made on a form provided by the Committee for that purpose and received by the Committee no later than the date established by the Committee preceding the date on which the distribution is to occur. An election which is made hereunder with respect to one payment in a series of periodic payments shall apply to all subsequent payments in that series, unless the distributee revokes such election. Any election made pursuant to this Section 13.6 may be revoked at any time prior to the date established by the Committee preceding the date on which the distribution is to occur. If an individual who is so entitled has not elected a direct rollover 57 63 within the time and in the maimer set forth above, such distributee shall be deemed to have affirmatively waived a direct rollover. A distributee who wishes to elect a direct rollover shall provide to the Committee, within the time and in the manner prescribed by the Committee, such information as the Committee shall reasonably request regarding the eligible retirement plan to which the payment or payments are to be transferred. The Committee shall be entitled to rely on the information so provided, and shall not be required to independently verify such information. The Committee shall be entitled to delay the transfer of any payment or payments pursuant to this Section 13.6 until it has received all of the information which it has requested in accordance with this Section 13.6. The provisions of this Section 13.6 shall not apply to any distribution in an amount which the Committee reasonably anticipates to total less than $200 during a calendar year. 13.7 Financial Hardship Withdrawals: A Participant may, upon the approval of the Committee, withdraw any portion of his Individual Account, other than amounts attributable to income on such Participant's Salary Reduction Contributions, on account of financial hardship. A Participant who wishes to request a hardship withdrawal shall file with the Committee a written request for withdrawal, on a form provided by the Committee. The Committee shall adopt uniform and nondiscriminatory rules regarding the granting of such requests and shall evaluate hardship requests made under this Section 13.7. Financial hardship means an immediate and heavy financial need of the Participant for which funds are not reasonably available from other resources of the Participant. If approved by the Committee, any withdrawal for financial hardship may not exceed the amount required to meet the immediate financial need created by the hardship. Furthermore, the Committee shall not approve the request of any Participant for a hardship withdrawal, unless the Participant has theretofore made all 58 64 withdrawals, other than hardship withdrawals, and has theretofore obtained all loans permitted under all plans maintained by the Employer. The determination of whether a Participant suffers sufficient hardship to justify the granting of his written request and of the amount permitted to be withdrawn under this Section 13.7 shall be made in the sole and absolute discretion of the Committee after a full review of the Participant's written request and evidence presented by the Participant showing financial hardship. A distribution will be treated as necessary to satisfy a financial hardship if the Committee relies upon the Participant's written representation, unless the Committee has actual knowledge to the contrary, that the hardship cannot reasonably be relieved: (a) through reimbursement or compensation by insurance or otherwise; (b) by liquidation of the Participant's assets; (c) by cessation of Salary Reduction Contributions under the Plan; or (d) by other distributions or nontaxable (determined at the time of the loan) loans from plans maintained by the Employer, or any other employer of such Participant, or by borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the financial hardship. Upon a Participant's receipt of a withdrawal for financial hardship, such Participant shall be prohibited from making Salary Reduction Contributions for a period of twelve (12) months, beginning on the date on which the hardship withdrawal is made. A Participant may elect to resume Salary Reduction Contributions as of the first payroll period commencing on or after the Entry Date next following the last day of such twelve (12) month period by executing a new payroll withholding agreement within the time period prior to such date established by the Committee. Upon a Participant's resumption 59 65 of Salary Reduction Contributions, the maximum amount of such contributions which may be made on such Participant's behalf for his taxable year following the taxable year in which the hardship withdrawal is made, is the applicable dollar limit for such following taxable year under Section 4.4 hereof, reduced by the amount of Salary Reduction Contributions made on his behalf for his taxable year in which the hardship withdrawal is made. Expenses which may warrant approval of a Participant's request for a hardship withdrawal include: (i) Expenses for medical care described in Section 213(d) of the Code previously incurred by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Section 152 of the Code) or necessary for these persons to obtain such medical care; (ii) Costs (excluding mortgage payments) directly related to the purchase of a principal residence of the Participant; (iii) Payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, his or her spouse, children or dependents, as defined above; or (iv) Payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. 13.8 Loans to Participants: Subject to such rules and regulations as may from time to time be promulgated by the Committee, the Committee, upon application of a Participant, may, in its sole and absolute discretion, direct the Trustee to make a loan or loans to such Participant 60 66 from his Rollover Contribution Account, and upon depletion of the funds in his Rollover Contribution Account, from his Salary Reduction Contribution Account, and upon depletion of the funds in his Salary Reduction Contribution Account, from his Company Matching Contribution Account, and upon depletion of the funds in his Company Matching Contribution Account, from his Prior Plan Employer Contribution Account, and upon depletion of the funds in his Prior Plan Employer Contribution Account, from his Prior Plan Employee Contribution Account, upon such terms as the Committee deems appropriate, and subject to the following requirements. A loan will be made to a Participant solely to relieve a financial hardship as described in Section 13.7, subject to the discretion of the Committee. The maximum amount which may be loaned is the lesser of: (a) $50,000.00, reduced as provided below, or (b) one-half of the value of the vested portion of the Participant's Individual Account as of the Valuation Date next preceding the date on which the Committee receives the Participant's loan application. The $50,000.00 limitation shall be reduced by the excess (if any) of: (i) the highest outstanding balance of loans from the Plan to the Participant during the one-year period ending on the day before the date on which such loan was made, over (ii) the outstanding balance of loans from the Plan to the Participant on the date on which such loan was made. In determining the maximum amount allowed hereunder as a loan, all loans to a Participant from all plans of the Employer and any Affiliate are to be aggregated. The minimum amount which may be loaned is One Thousand Dollars ($1,000.00), and no more than one loan may be outstanding at any time. Loans shall be granted by the Committee 61 67 in a uniform and nondiscriminatory manner. Each loan shall bear a reasonable rate of interest and be adequately secured, and shall by its terms require repayment in no later than five years unless such loan is used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as a principal residence of the Participant. All loans shall be repaid pursuant to a payroll deduction procedure established by the Employer unless the Participant is on an authorized leave of absence, in which case payment shall be made to the principal office of the Employer by check. All loans to Participants granted under this provision are to be considered a directed investment of such Participant. The loan shall remain an asset of the Trust, but to the extent of the outstanding balance of any such loan at any time, the Individual Account of the Participant to whom such loan is made alone shall share in any interest paid on such loan and alone shall bear any expenses or loss incurred in connection with such loan. Loans shall be made pro rata from each investment fund with respect to which a Participant's Individual Account is invested at the time of the loan and shall be repaid pro rata to each investment fund with respect to which the Participant's Individual Account was invested at the time of the loan. Each loan applicant shall receive a clear statement of the charges involved in each loan transaction. This statement shall include the dollar amount and annual interest rate of the finance charge. No distribution shall be made to any Participant or former Participant, or to a Beneficiary or beneficiaries, or the estate of a Participant unless and until (1) the amount to be distributed has been offset by all unpaid loans to the Participant from the Plan, together with interest, or (2) all unpaid loans to the Participant from the Plan, together with interest, have been paid in full. Notwithstanding the foregoing, no portion of an unpaid loan balance may be treated as a reduction of a Participant's Individual Account until such time as such reduction, if treated 62 68 as a distribution, will not breach the special distribution restrictions of Section 401(k)(2)(B) of the Code. 13.9 Withdrawals Upon Attainment of Age 59 1/2: Notwithstanding any other provisions of the Plan, a Participant who is still employed and who has attained the age of 59 1/2 may elect to withdraw all or any part of the vested amount in his Individual Account. The amount available for withdrawal shall be determined as of the Valuation Date concurrent with or preceding the date on which the Committee receives the Participant's request for withdrawal, and the withdrawal amount shall be distributed to the Participant as soon as practicable thereafter. The Committee shall direct the Trustee to make the distribution to the Participant in a lump sum in cash, unless in the Participant's written request for the distribution, he requests that it be in a form otherwise described in Section 13.1. A Participant who makes a withdrawal pursuant to this Section 13.9 will be subject to the suspension of contribution periods described under Section 13.12. 13.10 Withdrawals for Disability: If a Participant suffers a Disability, he may upon his written request or that of his legal guardian or representative receive a distribution of all or any of part of the vested amount in his Individual Account, other than amounts in his Salary Reduction Contribution Account. The Committee shall direct the Trustee to make the distribution to the Participant in a lump sum payment in cash, unless in the written request for the distribution, the Participant, or his legal guardian or representative, requests that it be in a form otherwise described in Section 13.1. The amount available for withdrawal shall be determined as of the Valuation Date concurrent with or next preceding the date on which the Committee receives the Participant's request for withdrawal, and the withdrawal amount shall be distributed as soon as practicable thereafter. A Participant (or his legal guardian or representative) who 63 69 makes a withdrawal pursuant to this Section 13.10 will be subject to the suspension of contribution periods described under Section 13.12. 13.11 Withdrawal of Pre-1986 Contributions: A Participant may withdraw all of the value of his Pre-1986 Contribution Account by filing a written notice with the Committee. The effective date of such written notice shall be the date the notice is received by the Committee or a date subsequent thereto if the Participant so states in his written notice. The amount available for withdrawal shall be determined as of the Valuation Date concurrent with or next preceding the date on which the Committee receives the Participant's request for withdrawal, and the withdrawal amount shall be distributed as soon as practicable thereafter. In the event of such a withdrawal, the Participant's participation in the Plan shall not terminate, but his Salary Reduction Contributions and the Company Matching Contributions which would otherwise be made on his behalf shall automatically be suspended for a period of twelve (12) months after such full withdrawal. Alternatively, a Participant may make a partial withdrawal of twenty-five percent (25%) of the value of his Pre-1986 Contribution Account in the same maimer provided above for a full withdrawal; provided, however, that the amount of such partial withdrawal shall be further limited, if applicable, to the amount equal to a Participant's total contributions as reflected on the Participant's December 31, 1985 statement under "Employee Contribution." If a Participant makes a partial withdrawal of his Pre-1986 Contribution Account, then the Participant's Salary Reduction Contributions and Company Matching Contributions which would otherwise be made on his behalf shall automatically be suspended for a period of six (6) months. 64 70 The trustee shall distribute any proceeds due under this Section 13.11 in a lump sum payment in cash, unless in the Participant's written request for the distribution, he requests that it be in a form otherwise described in Section 13.1. 13.12 Suspension of Contributions: In the event of a withdrawal under Section 13.9 or 13.10 which is twenty-five percent (25%) or less of the vested amount of the Participant's Individual Account, then the Participant's Salary Reduction Contributions and Company Matching Contributions which would otherwise be made on his behalf under the terms of the Plan shall automatically be suspended for six (6) months. In the event of a withdrawal under Section 13.9 or 13.10 which is greater than twenty-five percent (25%) of the vested amount of the Participant's Individual Account, up to and including a total withdrawal, then the Participant's Salary Reduction Contributions and Company Matching Contributions which would otherwise be made on his behalf under the terms of the Plan shall automatically be suspended for twelve (12) months. Notwithstanding the foregoing, in the event of an in-service withdrawal for Disability pursuant to Section 13.10, for the purpose of calculating twenty-five percent (25%) of the vested amount of the Participant's Individual Account under this Section 13.12, such amount shall exclude amounts in the Participant's Salary Reduction Contribution Account. ARTICLE XIV TRUSTEE, INVESTMENT MANAGERS AND DIRECTED INVESTMENTS 14.1 Appointment of Trustee: A Trustee (or Trustees) shall be appointed by the board of directors of the Company to administer the Trust Fund. The Trustee shall serve at the pleasure of the Company and shall have such rights, powers and duties as are provided to a Trustee under 65 71 ERISA for the investment of assets and for the administration of the Trust Fund, pursuant to the terms of the Trust. 14.2 Appointment of Investment Manager: An Investment Manager (or Investment Managers) may be appointed by the Committee to manage (including the power to acquire and dispose of) any part or all of the assets of the Trust Fund. The Investment Manager shall serve at the pleasure of the Committee, and shall have the rights, powers and duties provided to a Named Fiduciary under ERISA for the investment of the assets assigned to it. (The Investment Manager may be referred to from time to time hereafter as "he," "they," or "it," or may be referred to in the singular or plural, but all such references shall be to the then acting Investment Manager or Investment Managers serving hereunder.) 14.3 Responsibility of Trustee and Investment Manager: All contributions under this Plan shall be paid to and held by the Trustee, except when assets have been transferred to an insurance company. The Investment Manager shall have exclusive management and control of the investments and/or reinvestment of the assets of the Trust Fund assigned to it in writing by the Committee. All property and funds of the Trust Fund, including income from investments and from all other sources, shall be retained for the exclusive benefit of Employees, as provided in the Plan, and shall be used to pay benefits to Employees or their Beneficiaries, or to pay expenses of administration of the Plan and Trust Fund to the extent not paid by the Employer. This Plan and the related Trust is intended to allocate to each fiduciary the individual responsibilities of the prudent execution of the functions assigned to each. None of the allocated responsibilities or any other responsibility shall be shared by the fiduciaries or the Trustee unless such sharing shall be provided for by a specific provision in this Plan or related Trust. 66 72 14.4 Bonding of Trustee and Investment Manager: Neither the Trustee nor the Investment Manager shall be required to furnish any bond or security for the performance of their powers and duties hereunder unless the applicable law makes the furnishing of such bond or security mandatory. 14.5 Participant Direction of Investment: Each Participant shall have the right, within the guidelines established by the Committee, to direct the Committee to instruct the Trustee to invest all or a portion, if any, of such Participant's Individual Account in such investment funds as may be designated by the Committee from time to time. The Committee shall direct the Trustee or, if applicable, the Investment Manager as to the investment funds in which Participants may invest. The Committee may determine to offer as investment funds any investment fund, program or other vehicle which is suitable as a proper and permissible investment of contributions made to a retirement plan qualified pursuant to Section 401(a) of the Code, including Company Stock. Such investment funds shall be made available in a manner sufficient to comply with Section 404(c) of ERISA. The Committee shall be authorized at any time and from time to time, without amending the Plan, to modify, alter, delete or add to the investment funds available for investment at the direction of a Participant. In the event a modification occurs, the Committee shall notify those Participants whom the Committee, in its sole and absolute discretion, determines are affected by the change, and shall give such Participants such additional time as is determined reasonable by the Committee to designate the manner and percentage in which amounts invested in those funds thereby affected shall be invested. The Committee shall not be obligated to substitute funds of similar investment criteria for existing funds, nor shall it be obligated to continue the types of investments presently available 67 73 to the Participants. Nothing contained herein shall constitute any action by the Committee as a direction of investment of the assets or an attempt to control such direction. (a) Investment of Contributions: Any Participant, on or before entry into the Plan, within the time period established by the Committee, may designate the manner and the applicable percentage in which the Participant desires the Trustee to invest his current contributions, pursuant to the provisions set forth above, which designation shall continue in effect until revoked or modified by the Participant. If a Participant fails to designate the investment of his current contributions on or before his entry into the Plan, the Participant may make such designation, within the time period established by the Committee, to become effective as soon as practicable until revoked by the Participant. In the event the nature of any fund shall, in the opinion of the Committee, change, then the Committee shall notify those Participants who the Committee, in its sole and absolute discretion, determines are affected by the change, who shall then have a reasonable period of time, as determined by the Committee, to designate the manner and the applicable percentages in which amounts invested in those funds affected by the change shall be invested. Any amounts with respect to which the Trustee fails to receive a proper investment direction from any Participant shall be invested as provided in Section 14.3 above, or as otherwise directed by the Committee to the Trustee. All investment designations under this subparagraph (a) shall be made in the manner prescribed by the Committee. 68 74 The Committee shall maintain separate subaccounts in the name of each Participant within his Individual Account to reflect such Participant's accrued benefit attributable to his directed investment in each investment fund. (b) Conversion of Investments: Subject to subparagraph (c) below, each Participant or former Participant shall have the right, within the time period or periods established by the Committee, and subject to any restrictions on transfer imposed under particular investment funds, to convert, within the guidelines established by the Committee, up to one hundred percent (100%) of the amount in his Individual Account which he has previously directed in any investment fund hereunder into one or more of the other investment funds designated by the Committee for investment pursuant to this Section 14.5. A direction to convert by any eligible Participant or former Participant shall be made in the manner prescribed by the Committee within the time period established by the Committee. Any conversion of investments pursuant to this subparagraph (b) shall not affect a Participant's direction of investments with respect to his future contributions pursuant to subparagraph (a) hereof. If a Participant's spouse who is not a Participant in this Plan acquires an interest in a Participant's Individual Account pursuant to a qualified domestic relations order, then the Participant's spouse may direct the Committee to convert the investment of the interest to which such spouse is thus entitled in the same manner and at the same time as the Participant may direct a conversion of investments, as provided above. (c) Prior Plan Employee Contribution Account and Prior Plan Employer Contribution Account: Prior to July 1, 2000, the Prior Plan Employee Contribution 69 75 Accounts and Prior Plan Employer Contribution Accounts of Participants were invested solely in Company Stock. After July 1, 2000, all Prior Plan Employee Contribution Accounts and Prior Plan Employer Contribution Accounts will remain invested in Company Stock and Participants shall not be able to convert such accounts into any other investment option (such Company Stock fund hereinafter defined as the "Frozen Company Stock Fund"). Notwithstanding the foregoing, when a Participant has reached Normal Retirement Age, he may elect to direct the investment of all or a portion of his Prior Plan Employee Contribution Account and Prior Plan Employer Contribution Account from the Frozen Company Stock Fund into the other investment options designated by the Committee for investment in accordance with this Section 14.5. (d) Miscellaneous: The provisions of this Section 14.5 shall be subject to such administrative rules as may be established by the Committee. The Committee is authorized to establish such additional rules and regulations, from time to time, as it determines are necessary to carry out the provisions of this Section 14.5. For purposes of this Section 14.5, each Participant or former Participant shall be deemed to be effecting a "directed investment" of his Individual Account by exercising control of the investments in such Participant's or former Participant's Individual Account, to the extent any investment fund is selected by the Participant or former Participant, as provided herein. To the extent that the Committee, the Trustee and any Investment Manager follow the directions of a Participant or former Participant with respect to any acts involving an investment fund, then neither the Committee, the Trustee, nor the Investment Manager shall be liable for any loss or damage, or by reason of any breach, which arises from the Participant's or former Participant's exercise or non-exercise of his 70 76 rights under this Section 14.5 over the assets in his Individual Account, as provided in Section 404(c) of ERISA. ARTICLE XV AMENDMENT AND TERMINATION OF PLAN 15.1 Amendment of Plan: The Company may, without the assent of any other party, make from time to time any amendment or amendments to this Plan which do not cause any part of the Trust Fund to be used for, or diverted to, any purpose other than the exclusive benefit of Employees included in the Plan. To the extent that an amendment to the Plan affects the rights or duties of the Trustee hereunder, the Company shall obtain the Trustee's written consent to such amendment. Any amendment to the Plan shall be by a written instrument executed by the Company, and shall become effective as of the date specified in such instrument. Notwithstanding the foregoing, no amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's accrued benefit, except as provided in Section 412(c)(8) of the Code. For purposes of the preceding sentence, an amendment which has the effect of decreasing a Participant's Individual Account or eliminating an optional form of benefit, with respect to benefits attributable to service prior to such amendment shall be treated as reducing an accrued benefit. If any amendment changes the vesting schedules set forth in Sections 10.1 or 17.4, then a Participant's nonforfeitable percentage in his Individual Account because of a change to the vesting schedule shall not be less than his nonforfeitable percentage computed under the vesting schedule in effect prior to the amendment. Furthermore, if any amendment changes the vesting schedules set forth in Sections 10.1 or 17.4, then each Participant having at least three (3) Years of Vesting Service may elect to have the nonforfeitable percentage of his Individual Account computed under the Plan without regard to the amendment. 71 77 The Participant must file his written election with the Committee within sixty (60) days after receipt of a copy of the amendment. The Committee shall furnish the Participant with a copy of the amendment and with notice of the time within which his election must be returned to the Committee. 15.2 Right to Terminate and Withdraw: An Employer may at any time, by adoption of a resolution of its Board of Directors, terminate the Plan with respect to all or any part of the Employees employed by said Employer, and may direct and require the Trustee to liquidate the share of the Trust Fund allocable to such Employees or their Beneficiaries. If the Plan is not terminated by each and every Employer, the Plan shall continue in effect for Employees of each Employer which does not so terminate the Plan. However, the Company may elect to terminate the Plan for all participating Employers. In the event that an Employer shall cease to exist, the Plan shall be terminated with respect to the Employees of such Employer, unless a successor organization adopts and continues the Plan. A terminating or withdrawing Employer shall give ninety (90) days' notice in writing of its intention to the Committee, the Trustee and the Company unless a shorter notice is agreed to by the Committee and Trustee. If an Employer withdraws from this Plan and provides for a successor plan for its Employees, the Trust Fund assets of this Trust held on behalf of such Employer shall be determined and transferred to a successor trust upon approval by the District Director of Internal Revenue of the successor Plan and Trust. 15.3 Suspension and Discontinuance of Contributions: In the event an Employer decides it is impossible or inadvisable for it to continue to make its contributions as provided in Article IV, it shall have the power by appropriate resolution to either: (a) suspend its contributions to the Plan; 72 78 (b) discontinue its contributions to the Plan; or (c) terminate the Plan. Suspension shall be a temporary cessation of contributions and shall not constitute or require a termination of the Plan. Such a suspension which has not ripened into a complete discontinuance shall not constitute or require a termination of the Plan or Trust or any vesting of Individual Accounts, other than as prescribed by the provisions of Section 10.1. A complete discontinuance of contributions by an Employer shall not constitute a formal termination of the Plan and shall not preclude later contributions, but all Individual Accounts of Participants employed by such Employer not theretofore fully vested shall be and become 100% vested and nonforfeitable in the respective Participants, irrespective of the provisions of Section 10.1. In such event, Employees of such Employer who become eligible to enter the Plan subsequent to the discontinuance shall receive no benefit, and no additional benefits attributable to such Employer's contributions shall accrue to any of such Participants unless such contributions are resumed. After the date of a complete discontinuance of contributions, the Trust shall remain in existence as provided in this Section 15.3, and the provisions of the Plan and Trust shall remain in force as may be necessary in the sole opinion of the Committee. 15.4 Liquidation of Trust Fund: Upon termination or partial termination of the Plan by an Employer, the Individual Accounts of all Participants, former Participants and Beneficiaries shall thereupon be and become fully vested and nonforfeitable. Thereupon, the Trustee shall convert the Trust Fund to cash after deducting all charges and expenses. The Committee shall then adjust the balances of all Individual Accounts, as provided in Section 5.2. Thereafter, the Trustee shall distribute the amount to the credit of each affected Participant, former Participant 73 79 and Beneficiary, in accordance with the provisions of Article XIII hereof and the terms of the Trust. 15.5 Consolidation or Merger: This Plan shall not be merged or consolidated with, nor shall any assets or liabilities be transferred to, any other plan, unless the benefits payable to such Participant if the Plan was terminated immediately after such action would be equal to or greater than the benefits to which such Participant would have been entitled if this Plan had been terminated immediately before such action. The Plan shall not accept a direct transfer of assets from a plan subject to the requirements of Section 417 of the Code. ARTICLE XVI GENERAL PROVISIONS 16.1 No Employment Contract: Nothing contained in this Plan shall be construed as giving any person whomsoever any legal or equitable right against the Committee, the Employer, their stockholders, officers or directors or against the Trustee, except as the same shall be specifically provided for in this Plan or the Trust. Nor shall anything in this Plan give any Participant or other Employee the right to be retained in the service of an Employer and the employment of all persons by an Employer shall remain subject to termination by such Employer to the same extent as if this Plan had never been executed. 16.2 Manner of Payment: Wherever and whenever it is herein provided for payments or distributions to be made, whether in money or otherwise, said payments or distributions shall be made directly into the hands of the Participant, his Beneficiary, his administrator, executor or guardian, or an alternate payee pursuant to Section 13.5 herein, as the case may be. A deposit to the credit of a person entitled to payment in any bank or trust company selected by such person shall be deemed payment into his hands, and provided further that in the event any person 74 80 otherwise entitled to receive any payment or distribution shall be a minor or an incompetent, such payment or distribution may be made to his guardian or other person as may be determined by the Committee. 16.3 Nonalienation of Benefits: Subject to Section 414(p) of the Code and Section 13.5 herein relating to qualified domestic relations orders, the interest of any Participant or Beneficiary hereunder shall not be subject in any manner to any indebtedness, judgment, process, creditors' bills, attachments, garnishment, levy, execution, seizure or receivership, nor shall such interest be in any manner reduced or affected by any transfer, assignment, conveyance, sales, encumbrance, act, omission, or mishap, voluntary or incidental, anticipatory or otherwise, of or to said Participant or Beneficiary, and they and any of them shall have no right or power to transfer, convey, assign, sell or encumber said benefits and their interest therein, legal or equitable, during the existence of this Plan. Notwithstanding the foregoing, no provision of this Plan shall preclude the enforcement of a Federal tax levy made pursuant to Section 6331 of the Code or collection by the United States on a judgment resulting from an unpaid tax assessment. 16.4 Titles for Convenience Only: Titles of the Articles and Sections hereof are for convenience only and shall not be considered in construing this Plan. Also, words used in the singular or the plural may be construed as though in the plural or singular where they would so apply. 16.5 Validity of Plan: This Plan and each of its provisions shall be construed and their validity determined by the laws of the State of Texas, and all provisions hereof shall be administered in accordance with the laws of said State, provided that in case of conflict, the provisions of ERISA shall control. 75 81 16.6 Plan Binding: This Plan shall be binding upon the successors and assigns of the Employer and the Trustee and upon the heirs and personal representatives of those individuals who become Participants hereunder. 16.7 Return of Contributions: This Plan and the related Trust are designed to qualify under Sections 401(a) and 501(a) of the Code. Anything contained herein to the contrary notwithstanding, if the initial determination letter is issued by the District Director of Internal Revenue to the effect that this Plan and related Trust hereby created, or as amended prior to the receipt of such letter, do not meet the requirements of Section 401(a) and 501(a) of the Code, each Employer shall be entitled at its option to withdraw all contributions theretofore made, in which event the Plan and Trust shall then terminate. Each Employer's contributions to the Plan are specifically conditioned on their deductibility, and the Trustee, upon written request from an Employer, shall return to such Employer the amount of the Employer's contribution made as a result of a mistake of fact or the amount of such Employer's contribution disallowed as a deduction under Section 404 of the Code. Such return of contribution must be within one (1) year after (a) such Employer made the contribution by mistake of fact or (b) the disallowance of the contribution as a deduction. The amount of Employer contribution subject to being returned hereunder shall not be increased by any earnings attributable to the contribution, but such amount subject to being returned shall be decreased by any losses attributable to it. 16.8 Missing Participants or Beneficiaries: Each Participant shall file with the Committee from time to time in writing a mailing address and any change of mailing address for himself and his designated Beneficiary. Any communication, statement or notice addressed to a Participant or Beneficiary at the last mailing address filed with the Committee, or if no such 76 82 address is filed with the Committee, then at his last mailing address as shown on his Employer's records, shall be binding on the Participant or his Beneficiary for all purposes of the Plan. The Committee shall not be required to search for or locate a Participant or Beneficiary. If the Committee notifies any Participant or Beneficiary that he is entitled to a distribution and also notifies him of the provisions of this Section 16.8 (or makes reasonable effort to so notify such Participant or Beneficiary by certified letter, return receipt requested, to the last known address, or such other further diligent effort, including consultation with the Social Security Administration, to ascertain the whereabouts of such Participant or Beneficiary as the Committee deems appropriate) and the Participant or Beneficiary fails to claim his distributive share or make his whereabouts known to the Committee within three years thereafter, the distributive share of such Participant or Beneficiary will be forfeited according to Section 6.4. However, if the Participant or his Beneficiary should, thereafter, make a proper claim for such share, it shall be distributed to him. 16.9 Qualified Military Service: Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. ARTICLE XVII TOP-HEAVY RULES 17.1 Definitions: For purposes of applying the provisions of this Article XVII: (a) "Key Employee" shall mean, as of any Determination Date, any Employee or former Employee who, at any time during the Plan Year (which includes the Determination Date) or during the preceding four Plan Years, is (i) an officer of an Employer having Compensation from the Employer and any Affiliate greater than fifty 77 83 percent (50%) of the amount in effect under Section 415(b)(l)(A) of the Code for any such Plan Year, (ii) one of the ten Employees of an Employer having Compensation from the Employer and any Affiliate of more than the limitation in effect under Section 15(c)(l)(A) of the Code and owning the largest interests in such Employer, (iii) a Five Percent (5%) Owner of an Employer, or (iv) a One Percent (1%) Owner of an Employer who has Compensation of more than $150,000. The constructive ownership rules of Section 318 of the Code (or the principles of that section, in the case of an unincorporated Employer) will apply to determine ownership in an Employer. The Committee will make the determination of who is a Key Employee in accordance with Section 416(i)(1) of the Code and the regulations under that section of the Code. The Beneficiary of a Key Employee shall be treated as a Key Employee for purposes of determining whether this Plan is top-heavy. (b) "Non Key Employee" is an Employee who does not meet the definition of Key Employee. (c) "Compensation" shall mean compensation as defined in Section 2.1(v) hereof. (d) "Required Aggregation Group" means: (i) Each qualified plan of an Employer or an Affiliated Entity in which at least one (1) Key Employee participates or participated at any time during the Plan Year which includes the Determination Date, or during the preceding four Plan Years (regardless of whether the plan has terminated); and 78 84 (ii) Any other qualified plan of an Employer which enables a plan described in (i) to meet the requirements of Section 401(a)(4) of the Code or Section 410 of the Code. (e) "Permissive Aggregation Group" is the Required Aggregation Group plus any other qualified plans maintained by an Employer, but only if such group would satisfy in the aggregate the requirements of Section 401 (a)(4) of the Code and Section 410 of the Code. The Committee shall determine which plans to take into account in determining the Permissive Aggregation Group. (f) "Determination Date" for any Plan Year is the Allocation Date of the preceding Plan Year. (g) "Five Percent (5%) Owner" is any person who owns more than five percent (5%) of the outstanding stock of an Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of an Employer. (h) "One Percent (1%) Owner" is any person who owns more than one percent (1%) of the outstanding stock of an Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of an Employer. (i) "Affiliated Entity" shall mean any and all Affiliates of an Employer. 17.2 Determination of-Top Heavy Status: The Plan is-Top Heavy for a Plan Year with respect to a particular Employer if the Top-Heavy Ratio for that Employer as of the Determination Date exceeds sixty percent (60%). The Plan is Super Top-Heavy for a Plan Year if the Top-Heavy Ratio as of the Determination Date exceeds ninety percent (90%). The Top-Heavy Ratio is a fraction, the numerator of which is the sum of the present value of the Individual Accounts of all Key Employees as of the Determination Date, the contributions for all 79 85 Key Employees of such Employer that are due as of Determination Date, and distributions made to all Key Employees, of such Employer within the five (5) year period immediately preceding the Determination Date, and the denominator of which is a similar sum determined for all Employees of such Employer. If an Employee has not performed any services for an Employer at any time during the five (5) year period ending on the Determination Date, any amount in the Individual Account of such Employee shall not be taken into account. The Committee shall calculate the Top-Heavy Ratio without regard to any Non-Key Employee who was formerly a Key Employee. The Committee shall calculate the Top- Heavy Ratio, including the extent to which it must take into account distributions, rollovers and transfers, in accordance with Section 416 of the Code and the regulations under that section of the Code. If an Employer maintains other qualified plans (including a simplified employee pension plan) this Plan is Top-Heavy only if it is part of the Required Aggregation Group, and the Top-Heavy Ratio for both the Required Aggregation Group and the Permissive Aggregation Group exceeds sixty percent (60%). If the Employer maintains other qualified plans (including a simplified employee pension plan) this Plan is Super Top-Heavy only if it is part of the Required Aggregation Group, and the Top-Heavy Ratio for both the Required Aggregation Group and the Permissive Aggregation Group exceeds ninety percent (90%). The Committee will calculate the Top-Heavy Ratio in the same manner as required by the first paragraph of this Section 17.2, taking into account all plans within the aggregation group. The Committee shall calculate the present value of accrued benefits and the other amounts the Committee must take into account, under defined benefit plans or simplified employee pension plans included within the group in accordance with the terms of those plans, Section 416 of the Code and the regulations under that 80 86 section of the Code. The Committee shall calculate the Top Heavy Ratio with reference to the Determination Dates that fall within the same calendar year. 17.3 Minimum Employer Contribution: If this Plan is Top-Heavy with respect to a particular Employer in any Plan Year beginning after December 31, 1983, such Employer shall make a minimum contribution for each Non-Key Employee who is a Participant employed by the Employer on the Allocation Date of such Plan Year equal to the lesser of: (a) three percent (3%) of such Non-Key Employee's Compensation or (b) the highest contribution rate received by a Key Employee. The contribution rate is the sum of employer contributions and forfeitures allocated to the Participant's Individual Account for the Plan Year divided by his Compensation for the Plan Year. To determine the contribution rate, the Committee shall consider all qualified defined contribution plans maintained by such Employer as a single Plan. If the contribution rate, excluding Salary Reduction Contributions and Company Matching Contributions, for the Plan Year with respect to a Non-Key Employee is less than the minimum contribution, the Employer will increase its contribution for such Non-Key Employee to the extent necessary so his contribution rate for the Plan Year will equal the required minimum contribution. If the minimum contribution is made for a Non-Key Employee pursuant to another qualified plan maintained by an Employer, then the minimum contribution requirement will be considered satisfied for purposes of this Plan. 17.4 Minimum Vesting: For any Plan Year for which the Plan is Top-Heavy with respect to a particular Employer beginning after December 31, 1983, the Committee shall calculate the percentage of the amount in a Participant's Company Matching Contribution Account which is vested and nonforfeitable according to the vesting schedule applicable under Section 10.1. The Committee shall apply the vesting schedule set forth above to a Participant 81 87 who earns at least one (1) Hour of Service after such schedule becomes effective. If the Top-Heavy status of the Plan for such Employer changes so that there is a shift between the vesting schedules set forth above and set forth in Section 10.1, then a Plan amendment will be deemed to have occurred so that the provisions of Section 15.1 of the Plan become applicable. ARTICLE XVIII ADOPTION AND WITHDRAWAL BY OTHER ORGANIZATIONS 18.1 Procedure for Adoption: Subject to the further provisions of Section 18.1, any corporation or other organization with employees, now in existence or hereafter formed or acquired, which is not already an Employer under this Plan and which is otherwise legally eligible, may, in the future, with the consent and approval of the Company, by formal resolution of its own board of directors, adopt the Plan hereby created and the related Trust, and thereby, from and after the specified effective date, become an Employer under this Plan. Such adoption shall be effectuated by and evidenced by a formal designation resolution of the Company, and by such formal resolution of the adopting organization. It shall not be necessary for the adopting organization to sign or execute the original or then amended Plan and Trust documents. The effective date of the Plan for any such adopting organization shall be that stated in the resolution or decision of adoption, and from and after such effective date such adopting organization shall assume all the rights, obligations and liabilities of an individual Employer entity hereunder and under the Trust. The administrative powers and control of the Company, provided in the Plan and Trust, including the sole right to amendment and of appointment and removal of the Committee and the Trustee and their successors, shall not be diminished by reason of the participation of any such adopting organization in the Plan and Trust. 82 88 18.2 Withdrawal: Any participating Employer, by action of its board of directors and by giving notice to the Company and Trustee, may withdraw from the Plan and Trust at any time without affecting any other Employer not withdrawing, by complying with the provisions of the Plan and Trust. A withdrawing Employer may arrange for the continuation of this Plan and Trust in separate forms for its own Employees, with such amendments, if any, as it may deem proper, and may arrange for continuation of the Plan and Trust by merger with an existing plan and trust, and transfer of Trust assets. The Company may, in its absolute discretion, terminate an adopting Employer's participation at any time when in its judgment such adopting Employer fails or refuses to discharge its obligations under the Plan. 18.3 Adoption Contingent Upon Initial and Continued Qualification: The adoption of this Plan and its related Trust by an organization as provided in Section 18.1 is hereby made contingent on and subject to the condition precedent that said adopting organization meets all the statutory requirements for qualified plans, including but not limited to Section 401(a) and 501(a) of the Code, for its Employees. The adopting organization shall, upon request of the Committee, request an initial approval letter of determination from the appropriate District Director of Internal Revenue to the effect that the Plan and Trust herein set forth, or as amended before the receipt of such letter, meets the requirements of the applicable federal statutes for tax qualification purposes for such adopting organization and its covered Employees. Unless such an initial approval letter is issued, such adoption shall become void and inoperative and any contributions made by or for such organization after such adoption shall be promptly refunded by the Trustee. Furthermore, if the Plan or the Trust in its operation becomes disqualified, as to such adopting organization and its Employees, the portion of the Trust Fund allocable to them shall be segregated as soon as is administratively feasible, pending either, the prompt (a) re-qualification 83 89 of the Plan and Trust as to such organization and its Employees to the satisfaction of the Internal Revenue Service, so as not to affect the continued qualified status thereof as to any other Employer, or (b) withdrawal of such organization from this Plan and Trust and a continuation of its own Plan and Trust separately from this Plan and Trust, or by merger with another existing plan and trust, with a transfer of said segregated portion of Trust assets, as provided by Section 18.2, or (c) termination of the Plan and Trust as to itself and its Employees. ARTICLE XIX FIDUCIARY PROVISIONS 19.1 General Allocation of Duties: Each fiduciary with respect to the Plan shall have only those specific powers, duties, responsibilities and obligations as are specifically given him under the Plan. The Trustee shall have only those specific powers, duties, responsibilities and obligations as are specifically given it in the Trust. The board of directors of each Employer shall have the sole responsibility for authorizing its contributions under the Plan and for terminating the Plan. The Company shall have the sole authority to appoint and remove the Trustee or members of the Committee and to amend or terminate this Plan, in whole or in part. The Committee shall have the sole authority to appoint and remove the Investment Managers. The board of directors of the Company and the Committee, respectively, shall make formal periodic reviews of the Investment Managers' investments and performance in order to determine if such investments and performance are in conflict with the provisions of ERISA. However, said board and Committee, respectively, shall not be liable for any acts or omissions of the Investment Manager or be under any obligation to invest or otherwise manage any assets of the Trust Fund which are subject to the management of the Investment Manager unless they know that said Investment Manager has committed a breach of the obligations and duties set 84 90 forth in ERISA. Except as otherwise specifically provided, the Committee shall have the sole responsibility for the administration of the Plan, which responsibility is specifically described herein. It is intended under the Plan that each fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations hereunder and shall not be responsible for any act or failure to act of another fiduciary, except to the extent provided by law or as specifically provided herein. 19.2 Fiduciary Duty: Each fiduciary under the Plan shall discharge its duties and responsibilities with respect to the Plan: (a) solely in the interest of the Plan Participants, for the exclusive purpose of providing benefits to such Participants, and their Beneficiaries, and defraying reasonable expenses of administering the Plan; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; (c) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is prudent not to do so; and (d) in accordance with the documents and instruments governing the Plan insofar as such documents and instruments are consistent with applicable law. 19.3 Fiduciary Liability: A fiduciary shall not be liable in any way for any acts or omissions constituting a breach of fiduciary responsibility occurring prior to the date it becomes a fiduciary or after the date it ceases to be a fiduciary. 19.4 Co-Fiduciary Liability: A fiduciary shall not be liable for any breach of fiduciary responsibility by another fiduciary unless: 85 91 IN WITNESS WHEREOF, Tandy Brands Accessories, Inc. has caused its corporate seal to be affixed hereto and these presents to be duly executed in its name and behalf by its proper officers thereunto duly authorized this 1st day of June, 2000. ATTEST: TANDY BRANDS ACCESSORIES, INC. /s/ [ILLEGIBLE] - -------------------------- By: /s/ J S B JENKIN Assistant Secretary --------------------------------- Its: President --------------------------------- EX-13.1 5 d80391ex13-1.txt ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13.1 [TANDY BRANDS ACCESSORIES, INC. LOGO] [GRAPHIC] ANNUAL REPORT 2000 CHALLENGE RESPONSE 2 LETTER TO SHAREHOLDERS ================================================================================ Dear Shareholders: Several negative circumstances converged during this past fiscal year to prevent us from achieving our planned level of financial performance. Sales were impacted by the discontinuation of business of several retail customers as a result of industry consolidations, bankruptcies, and store closures; unusual softness in the market for women's accessories; loss of a major women's leather wallet program; and ordering delays in normally predictable replenishment programs. While we are disappointed with the results, we believe that these events were a unique combination of situation and timing, and our focus has now turned forward to fiscal 2001. The challenge to improve lies clearly before us and we are confident that our planned response will result in increased sales and profits for fiscal 2001. With the writing of this letter, we are already two months into the next fiscal year and we are successfully executing our plan. Our core men's business remained strong in fiscal 2000 and is on the way to another good year with the continuation of two particularly interesting initiatives. The first and largest of these initiatives involves a complete update of our ROLFS(R) brand of leather accessories. The impact of this new product, packaging and fixturing presentation can be seen in over 1,300 department stores now carrying this exciting new merchandise offering. The second initiative involves a handsome new collection of belts made in Italy. The retail response to this new Italian line has been fantastic in both private label and branded designs. Further optimism for fiscal 2001 comes from the introduction of our new Perry Ellis boys' accessories and the successful launch of our men's and women's travel accessory products under the ROLFS(R) brand. The women's business is well positioned for growth in 2001. This growth can be seen in the significantly expanded distribution plans for ROLFS(R) handbags and small leather goods to department stores across the country. We expect the combination of men's and women's efforts under the ROLFS(R) brand to generate positive results throughout 2001 and beyond. Additionally, we have expanded our women's cold weather accessories collection and are seeing a significant increase in orders for women's spring handbags. We remain extremely excited about the potential of our men's and women's products in the drug store and supermarket retail distribution channels. Although this is a relatively new arena for us, we are encouraged by the early results. In addition, during the last fiscal year, our Canterbury golf accessories sales increased eighty-three percent and we look forward to continuing that trend. On August 8, 2000, we announced a new licensing agreement with Levi Strauss & Co. that gives us exclusive rights to make and market women's handbags, personal leather goods and belts under the DOCKERS(R) brand. Although sales will not begin until July 2001, this is a major opportunity to work with a label that is recognized worldwide, and the initial design work is well underway. Our response to the ever-growing challenge of operational speed and flexibility can be seen in our new 135,000 square-foot distribution center in Dallas, Texas. This facility will handle all of our women's mass-market product distribution, including belts, hats, hair goods, straw handbags, socks, scarves and other trend and fashion items. We will be holding our annual shareholders' meeting at this new facility to highlight its state-of-the-art distribution systems and technology for our share-holders. The new center complements our other existing distribution centers in Yoakum, Texas; West Bend, Wisconsin; and Toronto, Canada. The Company's placement of fashion accessory products within the department store arena is at an all time high--the end result of a strategic objective to take a larger share of this important market segment. We are particularly pleased with how our design and merchandising teams have "raised the bar" in the creation of new and exciting fashion accessory items. It all begins with the merchandise and, based on our current stylings, we are well prepared to respond to the challenges of a continually changing retail landscape. On behalf of over a thousand Tandy Brands Accessories, Inc. team members, we want to thank you for your continued support. [PHOTO] (right) /s/ JAMES F. GAERTNER ------------------------------------- James F. Gaertner Chairman of the Board (left) /s/ J.S.B. JENKINS ------------------------------------- J.S.B. Jenkins President and Chief Executive Officer 3 ================================================================================ CHALLENGE: Expand market share of men's personal leather goods within department store distribution [PHOTO] RESPONSE: Complete update of ROLFS(R) brand product, packaging and presentation to increase sales with new and existing customers 4 ================================================================================ CHALLENGE: Leverage the strength of the ROLFS(R) brand in women's accessories [PHOTO] RESPONSE: Creation, introduction and sales of an all-new line of ROLFS(R) handbags to complement the existing line of personal leather goods 5 ================================================================================ CHALLENGE: Translate fast-moving fashion trends into affordable merchandise for high volume retail outlets [PHOTO] RESPONSE: Beautiful, high-quality straw handbags designed to be delivered to mass market retail stores across the country 6 ================================================================================ CHALLENGE: Satisfy the growing operational requirement of on-time, complete deliveries to a diverse spectrum of retail customers [PHOTO] [PHOTO] RESPONSE: A new, state-of-the-art, 135,000 sq. ft. merchandise distribution center in Dallas's new Pinnacle Park business development [PHOTO] 7 FINANCIAL POLICY ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES Through the expression of financial policies, the management and directors of Tandy Brands Accessories, Inc. seek to assure stock-holders that management targets ambitious growth and returns, while maintaining a prudent capital structure. Accordingly, we have set forth our financial policies and objectives in this annual report. As formulations, they are simple to understand. As management directives, they are challenging to achieve. CASH FLOW Maximizing cash flow is a cornerstone of the Company's financial policy. Cash, the most versatile asset, is the fuel for growth. Although short-term growth may be financed from external or internal sources, long-term growth relies ultimately on the generation of cash from operations. The Company seeks to optimize cash flow-defined as net income plus non-cash charges such as depreciation, amortization and deferred income tax expense-through consistent achievement of earnings growth, through high return on assets used in operations and through early recognition of tax benefits. Due to lower than anticipated net income, cash flow decreased 15.5% to $11.4 million from $13.2 million in 1999. CAPITAL STRUCTURE Total capital includes all continuing sources of capital to Tandy Brands Accessories, Inc., including interest-bearing debt, deferred income taxes and stockholders' equity. The Company's long-term objective is to maintain the ratio of interest-bearing debt to total capital to 30 percent or less. At June 30, 2000, the debt to total capital ratio decreased to 37 percent compared to 43 percent for the prior year. It is anticipated that the Company's debt will be further reduced in fiscal 2001 by the operational cash flow of the Company. LEVERAGE Tandy Brands Accessories, Inc. continues to finance its growth primarily through internal cash flow and the use of borrowed funds. At June 30, 2000, the Company had borrowings of $41.1 million under its bank lines of credit compared to $47.4 million in the prior year. It is anticipated that this debt will be repaid through future cash flows, allowing the Company to fund future growth and maintain its capital structure objectives. PROFIT GROWTH AND RETURN ON ASSETS The commitment of low-cost capital to a growth business requires the promise of attractive returns. Tandy Brands Accessories, Inc. seeks annual growth on average of at least 20 percent in pre-tax profits and a minimum pre-tax, pre-interest return on average assets used in operations of 25 percent. Assets used in operations include all assets except corporate cash, marketable securities and goodwill. During the year just ended, the Company's pre-tax profit decreased at a rate of 12.3 percent and its pre-tax, pre-interest return on average operating assets was 17.2 percent. RETURN ON EQUITY AND CAPITALIZATION Tandy Brands Accessories, Inc. also seeks, through a combination of high-asset returns and prudent debt levels, to achieve an after-tax return on average equity of at least 17 percent. During 2000, the Company achieved an after-tax return on average equity of 13 percent compared to a prior year performance of 16 percent. ANTICIPATED GROWTH The Company's objective is to achieve annual growth in operating assets of at least 15 percent. In fiscal 2000, because the Company's profit growth was below its financial policy target, management focused successfully on reducing its operating asset levels resulting in a reduction in accounts receivable and inventory while increasing sales in comparison to the previous year. This focus led to a growth of only one percent in operating assets for fiscal 2000. It is anticipated that during fiscal 2001, our operating assets will again grow in tandem with our profit growth. Because a portion of the Company's growth may continue to come from acquisitions, the use of stock for some acquisitions, subject to market conditions, could further accelerate the Company's average growth rate. 8 CONSOLIDATED STATEMENTS OF INCOME ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (In thousands, except per share amounts)
YEAR ENDED JUNE 30, 2000 1999 1998 --------- --------- --------- Net sales ................................................................ $ 189,951 $ 178,373 $ 135,041 Cost of goods sold ....................................................... 121,543 112,705 86,120 --------- --------- --------- Gross margin ........................................................... 68,408 65,668 48,921 Selling, general and administrative expenses ............................. 49,634 43,995 33,929 Depreciation and amortization ............................................ 3,517 3,135 1,990 --------- --------- --------- Total operating expenses ............................................... 53,151 47,130 35,919 --------- --------- --------- Operating income ......................................................... 15,257 18,538 13,002 Interest expense ......................................................... (3,236) (3,011) (1,517) Royalty and other income and early terminations of license agreements .... 1,717 135 176 --------- --------- --------- Income before provision for income taxes ................................. 13,738 15,662 11,661 Provision for income taxes ............................................... 5,089 5,945 4,424 --------- --------- --------- Net income ............................................................ $ 8,649 $ 9,717 $ 7,237 ========= ========= ========= Earnings per common share ................................................ $ 1.50 $ 1.70 $ 1.30 ========= ========= ========= Earnings per common share-assuming dilution .............................. $ 1.49 $ 1.67 $ 1.27 ========= ========= ========= Common shares outstanding ................................................ 5,760 5,725 5,576 ========= ========= ========= Common shares outstanding-assuming dilution .............................. 5,811 5,814 5,682 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 9 CONSOLIDATED BALANCE SHEETS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (Dollars in thousands)
JUNE 30, 2000 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents .................................................. $ 661 $ 180 Accounts receivable, net of allowances of $1,101 and $1,180 ................ 31,105 33,514 Inventories ................................................................ 55,340 55,559 Other current assets ....................................................... 2,371 1,823 --------- --------- Total current assets ..................................................... 89,477 91,076 --------- --------- Property, plant and equipment, at cost: Buildings .................................................................. 6,708 6,701 Leasehold improvements ..................................................... 1,339 1,100 Machinery and equipment .................................................... 14,270 10,732 --------- --------- 22,317 18,533 Accumulated depreciation .................................................. (9,305) (7,210) --------- --------- Net property, plant and equipment ....................................... 13,012 11,323 --------- --------- Other assets: Goodwill, net of accumulated amortization of $5,208 and $4,345 ............. 11,410 10,373 Other intangibles, net of accumulated amortization of $2,324 and $2,337 .... 6,035 6,561 Other noncurrent assets .................................................... 1,750 805 --------- --------- Total other noncurrent assets ............................................ 19,195 17,739 --------- --------- $ 121,684 $ 120,138 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................... $ 6,547 $ 5,835 Accrued payroll and bonuses ................................................ 1,824 1,710 Accrued expenses ........................................................... 2,180 2,684 --------- --------- Total current liabilities ................................................ 10,551 10,229 --------- --------- Other liabilities: Notes payable .............................................................. 41,075 47,425 Other noncurrent liabilities ............................................... 184 292 --------- --------- Total other liabilities .................................................. 41,259 47,717 --------- --------- Commitments (Note 7) Stockholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized; none issued .... -- -- Common stock, $1 par value; 10,000,000 shares authorized; 5,808,968 shares and 5,761,952 shares issued and outstanding as of June 30, 2000 and 1999, respectively ............................... 5,809 5,762 Additional paid in capital ................................................. 22,426 21,900 Cumulative other comprehensive income ...................................... (479) (381) Retained earnings .......................................................... 43,560 34,911 Treasury stock, at cost (156,092 shares at June 30, 2000) .................. (1,442) -- --------- --------- Total stockholders' equity ............................................... 69,874 62,192 --------- --------- $ 121,684 $ 120,138 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (In thousands)
YEAR ENDED JUNE 30, 2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income ........................................................................... $ 8,649 $ 9,717 $ 7,237 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation ..................................................................... 2,259 2,001 1,318 Amortization ..................................................................... 1,379 1,287 828 Deferred taxes ................................................................... (779) 677 295 Other ............................................................................ (63) (139) (134) Change in assets and liabilities, net of effects from acquisition: Accounts receivable .............................................................. 2,970 (9,002) (6,049) Accounts receivable purchased from AR Accessories Group, Inc. .................... -- 3,053 (3,053) Inventories ...................................................................... 919 (12,693) (7,517) Inventory purchased from AR Accessories Group, Inc. .............................. -- 5,137 (5,137) Other assets ..................................................................... (698) 212 441 Accounts payable ................................................................. 712 (954) 2,644 Accrued expenses ................................................................. (718) (3,104) 1,220 --------- --------- --------- Net cash provided by (used for) operating activities ................................. 14,630 (3,808) (7,907) --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment .................................................. (3,563) (2,791) (2,449) Sale of property and equipment ....................................................... -- -- 233 Acquisition of Tiger Accessories, Inc. ............................................... -- -- (5,591) Purchases of property, equipment and tradenames from AR Accessories Group, Inc. ...... -- -- (10,786) Purchase of assets of Frank Spielberg Sales, LLC. .................................... (3,367) -- -- --------- --------- --------- Net cash used for investing activities ............................................... (6,930) (2,791) (18,593) --------- --------- --------- Cash flows from financing activities: Sale of stock to stock purchase program .............................................. 1,441 1,392 1,047 Exercise of employee stock options ................................................... 190 279 222 Purchase of treasury stock ........................................................... (2,500) -- -- Proceeds from borrowings ............................................................. 94,670 73,727 82,350 Payments under borrowings ............................................................ (101,020) (68,902) (57,390) --------- --------- --------- Net cash provided by (used for) financing activities ................................. (7,219) 6,496 26,229 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ................................... 481 (103) (271) Cash and cash equivalents at beginning of period ....................................... 180 283 554 --------- --------- --------- Cash and cash equivalents at end of period ............................................. $ 661 $ 180 $ 283 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ........................................................................... $ 3,425 $ 2,810 $ 1,367 Income taxes ....................................................................... 5,824 4,699 4,553
The accompanying notes are an integral part of these consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (Dollars in thousands)
CUMULATIVE COMMON STOCK ADDITIONAL OTHER -------------------- PAID IN RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME ---------- -------- ---------- --------- ------------- Balance at June 30, 1997 ............................ 5,490,091 $ 5,490 $ 18,732 $ 17,957 $ (50) Comprehensive income: Net income ......................................... -- -- -- 7,237 -- Other comprehensive income, net of tax: Currency translation adjustments .................. -- -- -- -- (294) Comprehensive income ................................ Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ............................. 69,561 70 977 -- -- Sale of unissued common stock to employees for exercise of stock options ...................... 28,902 29 193 -- -- Issuance of stock pursuant to the acquisition of Tiger Accessories, Inc. ............................ 28,170 28 472 -- -- ---------- -------- ---------- --------- ------ Balance at June 30, 1998 ............................ 5,616,724 5,617 20,374 25,194 (344) Comprehensive income: Net income ......................................... -- -- -- 9,717 -- Other comprehensive income, net of tax: Currency translation adjustments .................. -- -- -- -- (37) Comprehensive income ................................ Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ............................. 87,335 87 1,305 -- -- Sale of unissued common stock to employees for exercise of stock options ...................... 57,893 58 221 -- -- ---------- -------- ---------- --------- ------ Balance at June 30, 1999 ............................ 5,761,952 5,762 21,900 34,911 (381) Comprehensive income: Net income ......................................... -- -- -- 8,649 -- Other comprehensive income, net of tax: Currency translation adjustments .................. -- -- -- -- (98) Comprehensive income ................................ Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ............................. 34,620 35 348 -- -- Sale of unissued common stock to employees for exercise of stock options ...................... 12,396 12 178 -- -- Purchase of treasury stock .......................... -- -- -- -- -- ---------- -------- ---------- --------- ------ Balance at June 30, 2000 ............................ 5,808,968 $ 5,809 $ 22,426 $ 43,560 $ (479) ========== ======== ========== ========= ====== TREASURY STOCK TOTAL -------------------- STOCKHOLDERS' SHARES AMOUNT EQUITY ---------- -------- ------------- Balance at June 30, 1997 ............................ -- $ -- $ 42,129 Comprehensive income: Net income ......................................... -- -- 7,237 Other comprehensive income, net of tax: Currency translation adjustments .................. -- -- (294) -------- Comprehensive income ................................ 6,943 -------- Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ............................. -- -- 1,047 Sale of unissued common stock to employees for exercise of stock options ...................... -- -- 222 Issuance of stock pursuant to the acquisition of Tiger Accessories, Inc. ............................ -- -- 500 ---------- -------- -------- Balance at June 30, 1998 ............................ -- -- 50,841 Comprehensive income: Net income ......................................... -- -- 9,717 Other comprehensive income, net of tax: Currency translation adjustments .................. -- -- (37) -------- Comprehensive income ................................ 9,680 -------- Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ............................. -- -- 1,392 Sale of unissued common stock to employees for exercise of stock options ...................... -- -- 279 ---------- -------- -------- Balance at June 30, 1999 ............................ -- -- 62,192 Comprehensive income: Net income ......................................... -- -- 8,649 Other comprehensive income, net of tax: Currency translation adjustments .................. -- -- (98) -------- Comprehensive income ................................ 8,551 -------- Sale of stock to the Tandy Brands Accessories, Inc. Stock Purchase Program ............................. 91,058 1,058 1,441 Sale of unissued common stock to employees for exercise of stock options ...................... -- -- 190 Purchase of treasury stock .......................... (247,150) (2,500) (2,500) ---------- -------- -------- Balance at June 30, 2000 ............................ (156,092) $ (1,442) $ 69,874 ========== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY AND BASIS OF PRESENTATION Tandy Brands Accessories, Inc. (the "Company") designs, manufactures and markets fine leather goods, handbags and fashion accessories for men, women and children. The Company sells its products to a variety of retail outlets, including national chain stores, discount stores, major department stores, specialty stores, catalog retailers, grocery stores, drug stores and the retail exchange operations of the United States military. The preparation of financial statements in conformity with generally accepted accounting principles 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. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the fiscal 2000 presentation. CASH AND CASH EQUIVALENTS The Company considers cash on hand, deposits in banks and short-term investments with original maturities of less than three months as cash and cash equivalents. INVENTORIES Inventories are stated at the lower of cost (principally standard cost which approximates actual cost on a first-in, first-out basis) or market. Cost includes materials, direct and indirect labor and factory overhead. Market, with respect to raw materials, is replacement cost; and for work-in-process and finished goods, it is net realizable value. Inventories consist of the following:
JUNE 30, 2000 1999 ------------ ------------ Raw materials .............. $ 3,760,000 $ 6,560,000 Work-in-process ............ 999,000 319,000 Finished goods ............. 50,581,000 48,680,000 ------------ ------------ $ 55,340,000 $ 55,559,000 ============ ============
PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated at the following rates using the straight-line method: Buildings 3% Leasehold improvements The lesser of the life of the lease or asset Machinery and equipment 10% to 33 1/3%
Maintenance and repairs are charged to expense as incurred. Renewals and betterments which materially prolong the useful lives of the assets are capitalized. The cost and the related accumulated depreciation of property retired or sold are removed from the accounts, and gains or losses from retirements and sales are recognized in the consolidated statements of income. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles are amortized using the straight-line method over their estimated useful lives ranging from three to forty years. The weighted-average number of years over which goodwill and other intangibles are amortized is 18 years. Goodwill and other intangibles are reviewed for impairment based on estimated future undiscounted cash flows. 13 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUES The Company recognizes re venue when merchandise is shipped to customers and title to the goods has passed from the Company to the customer. Sales returns and allowances are recorded at the time the amounts can be reasonably estimated by the Company. The Company performs periodic credit evaluations of its customers' financial conditions and generally does not require collateral. Credit losses have historically been within management's expectations. MAJOR CUSTOMER Consolidated net sales to Wal-Mart accounted for approximately 38%, 39% and 43% of the Company's sales in fiscal 2000, 1999 and 1998, respectively. Both men's and women's accessories sales include revenues from Wal-Mart. (See Note 13.) No other customers accounted for 10% or more of total revenues. STOCK-BASED COMPENSATION The Company may, with the approval of its Board of Directors, grant stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees," and, accordingly, recognizes no compensation expense for the stock option grants. The Company has adopted the disclosure-only provisions as specified by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting For Stock-Based Compensation." INCOME TAXES Income taxes have been provided for using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws. COMPUTER SOFTWARE COSTS DEVELOPED OR OBTAINED FOR INTERNAL USE In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the capitalization of certain internal costs to develop or obtain software for internal use that the Company would have previously expensed as incurred and requires expensing certain costs that the Company had capitalized. The effect of the adoption of SOP 98-1 during fiscal year 2000 did not materially impact the Company's consolidated financial position or statements of income, stockholders' equity or cash flows. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting guidelines for derivatives and requires companies to record all derivatives as assets or liabilities on the balance sheet at fair value. Additionally, this statement establishes accounting treatment for three types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments; hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. Any derivative that qualifies as a hedge, depending on the nature of the hedge, will either be offset through earnings against the change in fair value of the hedged assets, liabilities or firm commitments or recognized in other comprehensive income until the hedged item is recognized in earnings. This SFAS is effective for the Company beginning in fiscal 2001. The Company does not anticipate that the adoption of this statement will have a material impact on the Company's consolidated financial statements. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 2 - ACQUISITIONS On May 12, 1998, the Company purchased certain assets of AR Accessories Group, Inc. ("AR") through an auction held in the Bankruptcy Court for the Eastern District of Wisconsin. The assets included, but were not limited to, wholesale accounts receivable, wholesale inventory, certain machinery and equipment, the distribution center located in West Bend, Wisconsin, and related tradenames including "Amity" and "Rolfs." The cash purchase price of approximately $18,976,000 was provided by drawing on existing bank lines. The related tradenames acquired through the auction of approximately $5,866,000 are being amortized over 20 years. The purchase of such assets did not constitute a "business" for purposes of Rule 3-05 and Rule 11-01(d) of Regulation S-X of the Securities and Exchange Commission. As a result, disclosure of pro forma information giving effect to the purchase of certain assets of AR is not presented. On June 1, 1998, the Company acquired all of the outstanding common stock of Tiger Accessories, Inc. ("Tiger") for an aggregate purchase price of $6,091,000 including acquisition-related costs. The purchase price was comprised of $5,591,000 in cash and 28,170 shares of Company issued common stock valued at $500,000. Tiger is a manufacturer and marketer of men's and boys' belts to various mass merchants. In conjunction with the purchase, the Company assumed approximately $4,189,000 in liabilities of which $1,790,000 in bank indebtedness was immediately retired. The acquisition was accounted for under the purchase method of accounting and the resultant goodwill of approximately $3,937,000 and other intangibles related to consideration given for non-compete agreements of approximately $500,000 are being amortized over 20 and 3 years, respectively. Unaudited pro forma consolidated results of Tandy Brands Accessories, Inc. and Tiger, as if the acquisition had occurred at the beginning of fiscal year 1998, are as follows:
(Unaudited) 1998 ------------- Net sales .......................................... $ 150,121,000 Net income ......................................... $ 7,867,000 Earnings per common share .......................... $ 1.41 Earnings per common share - assuming dilution....... $ 1.38
On July 16, 1999, the Company purchased certain assets of Frank Spielberg Sales, LLC ("Spielberg"), a handbag designer and marketer based in St. Louis, Missouri, for approximately $3.4 million. The cash purchase price was provided by drawing on existing bank lines. Spielberg supplies proprietary design, marketing and sourcing expertise for handbags under department store private labels and direct sales to retailers. The acquisition was accounted for under the purchase method of accounting and the resultant goodwill of approximately $2,089,000 is being amortized over 20 years. The pro forma effects of this acquisition are not material. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 3 - EARNINGS PER SHARE The following sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
YEAR ENDED JUNE 30, 2000 1999 1998 ------ ------ ------ Numerator for basic and diluted earnings per share: Net income............................................................. $8,649 $9,717 $7,237 ====== ====== ====== Denominator: Weighted-average shares outstanding.................................. 5,745 5,708 5,559 Contingently issuable shares......................................... 15 17 17 ------ ------ ------ Denominator for basic earnings per share-weighted-average shares... 5,760 5,725 5,576 Effect of dilutive securities: Employee stock options................................................. 42 75 93 Director stock options................................................. 9 14 13 ------ ------ ------ Dilutive potential common shares....................................... 51 89 106 Denominator for earnings per share assuming dilution-adjusted weighted-average shares................................................ 5,811 5,814 5,682 ====== ====== ====== Earnings per share..................................................... $ 1.50 $ 1.70 $ 1.30 ====== ====== ====== Earnings per share-assuming dilution................................... $ 1.49 $ 1.67 $ 1.27 ====== ====== ======
Options to purchase approximately 523,000 shares of common stock at prices ranging from $8.78-$19.75 per share were outstanding during fiscal year 2000 but were not included in the computation of earnings per share-assuming dilution because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. NOTE 4 - STOCK REPURCHASE PROGRAM On April 26, 2000, the Company's Board of Directors approved a plan to repurchase, from time to time in the open market or through negotiated transactions, shares of the Company's common stock at an aggregate purchase price of up to $2,000,000 (the "repurchase program"). This program is an extension of the $2,000,000 repurchase program the Company initiated on October 20, 1999. Any open market purchases will be at prevailing market prices. The timing of any repurchases will depend on market conditions, market price, and management's assessment of the Company's liquidity and cash flow needs. Any repurchased shares will be added to the Company's treasury shares and may be used for the Company's stock plans and other corporate purposes. The funds required for the repurchases will be provided from the Company's current cash balances, operating cash flow, or the Company's credit facility. During fiscal 2000, the Company repurchased 247,150 shares of treasury stock under the repurchase program at a cost of approximately $2,500,000. During fiscal 2000, 91,058 shares of treasury stock were reissued to the Company's employee stock purchase program. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 5 - CREDIT ARRANGEMENTS The Company has an unsecured line of credit with a bank for $50,000,000. Of this amount, $25,000,000 is an uncommitted facility, which has no expiration date and is due on demand. The $25,000,000 committed facility is comprised of a $15,000,000 term note and a $10,000,000 committed revolving credit facility, both of which require the maintenance of certain financial covenants and a commitment fee of 1/4% on the unused balance. The $15,000,000 term note, which expires on November 17, 2003, bears interest at LIBOR plus 1%. The $10,000,000 committed revolving credit facility, which expires on May 17, 2002, bears interest at various rates with short-term durations. Principal payments on the term note and committed revolving credit facility are due on the expiration date. Each facility may be used for borrowings or letters of credit. At June 30, 2000 and 1999, the Company had borrowings under the committed facility of $25,000,000, bearing interest at 7.81% and 6.63%, respectively. At June 30, 2000 and 1999, the Company had borrowings under the uncommitted facility of $8,725,000 and $5,050,000, bearing interest at 7.81% and 6.63%, respectively. At June 30, 2000 and 1999, the Company had letters of credit under the uncommitted facility of $8,613,000 and $9,514,000, respectively, which were used in conjunction with merchandise procurement. As the additional borrowing availability provided under the line of credit discussed below is sufficient to fund current maturities under the uncommitted facility, current maturities have been reclassified as long-term. The Company has an unsecured line of credit with another bank for $40,000,000. Of this amount, $15,000,000, which expires on May 14, 2002, is an uncommitted facility and bears interest at various rates with short-term durations. The remaining $25,000,000, which expires May 14, 2002, is a committed facility which requires the maintenance of certain financial covenants and the payment of a commitment fee of 1/4% on the unused balance. The committed facility bears interest at negotiated rates. Each facility may be used for borrowings or letters of credit. At June 30, 2000 and 1999, the Company had total borrowings under such facilities of $7,350,000 and $17,375,000, bearing interest at 8.26% and 7.13%, respectively. The Company also has a Canadian line of credit for approximately $525,000 secured by a letter of credit from a U.S. bank. At June 30, 2000 and 1999, there were no borrowings under this line of credit. During fiscal 1999, the Company had an unsecured line of credit with another bank for $35,000,000. Of this amount, $25,000,000, which expired on April 30, 2000, was a committed facility. The line was used for borrowings or letters of credit and bears interest at negotiated rates. The remaining $10,000,000, which expired on April 30, 1999, was an uncommitted facility that may be used for borrowings or letters of credit and bears interest at various rates with short-term durations. On April 30, 1999, the outstanding balance of the $35,000,000 unsecured line of credit with another bank was paid and the agreement terminated. The Company is subject to interest rate risk on its long-term debt. The Company manages its exposure to changes in interest rates by the use of variable and fixed interest rate debt. In addition, the Company has hedged its exposure to changes in interest rates on a portion of its variable debt by entering into an interest rate swap agreement to lock in a fixed interest rate for a portion of these borrowings. During fiscal 1999, the Company entered into a five-year interest rate swap agreement, which expires on November 17, 2003, converting $15,000,000 of outstanding indebtedness from a variable to a fixed interest rate. The average receive rate is based on a 90-day LIBOR rate. At June 30, 2000, the receive and pay rates related to the interest rate swap were 6.76% and 6.52%, respectively. At June 30, 2000, the fair value of the interest rate swap agreement was approximately $642,000. Interest differentials to be paid or received because of the swap agreement are reflected as an adjustment to interest expense over the related debt period. The potential impact of market conditions on the fair value of the Company's indebtedness is not expected to be material. Given that such lines of credit bear interest at floating market interest rates, the fair value of amounts borrowed thereunder approximates carrying value. At June 30, 2000, the Company had borrowings under its credit lines of $41,075,000 bearing a weighted-average interest rate of 6.69%. Under the above credit facilities, future payments required for debt maturities will be $26,075,000 and $15,000,000 in fiscal years 2002 and 2003, respectively. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 6 - INCOME TAXES Significant components of the Company's deferred tax assets and liabilities as of June 30, 2000 and 1999, are as follows:
2000 1999 ------------ ------------ Deferred tax assets: Accounts receivable valuation ............ $ 335,000 $ -- Inventory valuation ...................... 1,486,000 949,000 Other, net ............................... 580,000 621,000 ----------- ----------- Total deferred tax assets: ............. 2,401,000 1,570,000 Deferred tax liabilities: Accounts receivable valuation ............ -- (90,000) Goodwill and other intangibles ........... (884,000) (688,000) Depreciation ............................. (25,000) (79,000) ----------- ----------- Total deferred tax liabilities: ........ (909,000) (857,000) ----------- ----------- Net deferred tax asset: .................... $ 1,492,000 $ 713,000 =========== ===========
Significant components of the provision for income taxes are as follows:
2000 1999 1998 ------------ ----------- ----------- Current: Federal .................... $ 5,483,000 $ 4,676,000 $ 3,686,000 Foreign .................... 64,000 79,000 72,000 State and local ............ 321,000 513,000 371,000 ----------- ----------- ----------- 5,868,000 5,268,000 4,129,000 ----------- ----------- ----------- Deferred: Federal .................... (740,000) 662,000 294,000 State and local ............ (39,000) 15,000 1,000 ----------- ----------- ----------- (779,000) 677,000 295,000 ----------- ----------- ----------- Income tax provision ..... $ 5,089,000 $ 5,945,000 $ 4,424,000 =========== =========== ===========
The following table reconciles the statutory federal income tax rate to the effective income tax rate:
2000 1999 1998 ----- ----- ----- Statutory rate ............................................. 34.0% 34.0% 34.0% State and local taxes, net of federal income tax benefit.... 1.4% 2.1% 2.1% Other, net ................................................. 1.6% 1.9% 1.8% ---- ---- ---- 37.0% 38.0% 37.9% ==== ==== ====
18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 7 - COMMITMENTS The Company leases property which includes office, manufacturing and warehouse facilities under operating leases, expiring through the year 2010 with varying renewal and escalation clauses. Rental expense for fiscal 2000, 1999 and 1998 totaled $1,814,000, $1,648,000 and $1,184,000, respectively. The Company has entered into licensing agreements with other companies for the purpose of using their trademarks on the Company's products. Royalty expense related thereto for fiscal 2000, 1999 and 1998 totaled $1,354,000, $1,534,000 and $1,382,000, respectively. Future minimum rental and royalty commitments as of June 30, 2000, are as follows:
FISCAL YEAR AMOUNT ----------- ----------- 2001 .......... $ 2,315,000 2002 .......... 1,821,000 2003 .......... 1,835,000 2004 .......... 1,441,000 2005 .......... 757,000 Thereafter .... 2,962,000 ----------- $11,131,000 ===========
NOTE 8 - TERMINATIONS OF LICENSE AGREEMENTS On November 9, 1999, the Company and Jones Apparel Group amended their existing licensing agreement. Under the amended agreement the Company will no longer design and market women's handbags under any JONES NEW YORK((R)) brands. As compensation for the early termination of women's handbag license rights, Jones Apparel Group paid the Company $1,500,000 in cash, of which a portion was used to wind down functions related to the license arrangements. Consequently, the results for fiscal 2000 include a one-time benefit, net of related costs, of $1,000,000 from the amendment of this licensing agreement. On March 3, 2000, the Company and Jones Apparel Group amended their existing licensing agreement. Under the amended agreement the Company will continue to design and market men's small leather goods and belts under various JONES NEW YORK((R)) brands but will no longer design and market women's small leather goods under any JONES NEW YORK((R)) brands. As compensation for the early termination of the small leather goods license rights, Jones Apparel Group paid the Company $800,000 in cash. Additionally, Jones Apparel Group reimbursed the Company for its current on-hand small leather goods inventory of approximately $950,000. Consequently, the results for fiscal 2000 include a one-time benefit, net of related costs, of $600,000 from the amendment of this licensing agreement. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 9 - EMPLOYEE STOCK OPTIONS The Company has adopted various stock option incentive plans for officers and key management employees. All options will be granted at the market price as of the date of grant and have a contractual life of ten years. Options are generally exercisable annually at a rate of 33% per year beginning one year after the grant date. At June 30, 2000 and 1999, the number of shares available for grant were 448,054 and 205,692, respectively. The following table reflects the employee stock option transactions subsequent to June 30, 1997:
NUMBER WEIGHTED-AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- Outstanding at June 30, 1997 349,554 $ 10.55 Options granted ................... 92,000 $ 12.89 Options exercised ................. (5,675) $ 7.34 Options canceled or expired ....... -- -- ------- Outstanding at June 30, 1998 ...... 435,879 $ 11.08 Options granted ................... 122,500 $ 17.25 Options exercised ................. (50,150) $ 4.38 Options canceled or expired ....... (12,875) $ 13.80 ------- Outstanding at June 30, 1999 ...... 495,354 $ 13.22 Options granted ................... 149,500 $ 15.45 Options exercised ................. (8,200) $ 7.97 Options canceled or expired ....... (34,700) $ 16.07 ------- Outstanding at June 30, 2000 ...... 601,954 $ 13.96 ======= Exercisable at June 30, 2000 ...... 359,683 $ 12.35 =======
The following table segregates outstanding options into groups based on price ranges of less than and more than $10 per share.
$2.74-$9.25 $10.33-$19.75 ----------- ------------- All outstanding options: Number of shares ............................... 132,926 469,028 Weighted-average exercise price ................ $ 7.26 $ 15.86 Weighted-average remaining contractual life .... 5.6 years 7.3 years Exercisable options: Number of shares ............................... 128,926 230,757 Weighted-average exercise price ................ $ 7.21 $ 15.22
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for fiscal 2000, 1999 and 1998: dividend yield of 0.0%; expected volatility of 0.375% for fiscal 2000 and 0.55% for fiscal 1999 and 1998; a risk-free interest rate of 7.25% for fiscal 2000 and 6.42% for fiscal 1999 and 1998; and an expected holding period of seven years. Using these assumptions for the options granted during fiscal 2000, 1999 and 1998, the weighted-average grant date fair value of such options was $8.80, $10.87 and $8.13, respectively. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 9 - EMPLOYEE STOCK OPTIONS (continued) The Black-Scholes valuation models are used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and the average life of options. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense on a straight-line basis over the options' vesting period. The Company's pro forma information follows:
2000 1999 1998 --------- --------- --------- Net income: As reported ................................. $ 8,649 $ 9,717 $ 7,237 Pro forma ................................... $ 7,939 $ 9,137 $ 7,113 Earnings per share: As reported ................................. $ 1.50 $ 1.70 $ 1.30 Pro forma ................................... $ 1.38 $ 1.60 $ 1.28 Earnings per share-assuming dilution: As reported ................................. $ 1.49 $ 1.67 $ 1.27 Pro forma ................................... $ 1.37 $ 1.57 $ 1.25
NOTE 10 - NON-EMPLOYEE DIRECTOR STOCK PLANS In fiscal 1995, the stockholders of the Company adopted the Tandy Brands Accessories, Inc. 1995 Stock Deferral Plan for Non-Employee Directors (the "Deferral Plan"). The Deferral Plan was established to provide non-employee directors an equity interest in the Company in order to attract and retain well-qualified individuals to serve as non-employee directors and to enhance the identity of interests between the non-employee directors and the stockholders of the Company. The Deferral Plan provides the directors with an election to defer the receipt of their annual and committee chair retainer fees until a future date determined by each director. The payment of such fees will be in the form of shares of the Company's common stock. The shares are calculated by dividing the deferred cash amount by the average closing price of the stock for each day of the period during which such cash amount would have been paid but for the deferral election. The Company records compensation expense for the amount of the directors' retainer fees. The Company benefits from cash retained when directors elect to defer their retainer fees and receive stock. The Deferral Plan provides for the granting of up to 50,000 shares of the Company's common stock to non-employee directors. The Deferral Plan became active in May 1996. During fiscal 2000 and 1999, there were 6,258 and 6,673 shares issued to directors, respectively. Prior to fiscal 1999, there were no shares issued to the directors. Amounts recorded as compensation expense related to the Deferral Plan for fiscal 2000, 1999 and 1998 were $25,447, $65,021 and $72,942, respectively. The Company offers other stock incentive plans for non-employee directors. In conjunction with these plans, 97,916 options were outstanding as of June 30, 2000. The options range in price from $6.50 to $19.00 and are generally exercisable at a rate of 33% per year beginning one year after the grant date. During fiscal 2000, no shares were exercised. Prior to fiscal 2000, options totaling 4,125 and 23,227 were exercised in fiscal 1999 and 1998, respectively. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 11 - EMPLOYEE BENEFIT PLANS The Tandy Brands Accessories, Inc. Employees Investment Plan (the "Plan") is open to substantially all employees who have been employed by the Company for over two years. Under the Plan, participants may contribute 5% of their earnings, with the Company matching 150%. The contributions are paid to a trustee and invested primarily in Company common stock. Employer contributions are fully vested upon payment. On July 1, 2000, the Company amended and restated the Plan whereby the 401(k) ["401(k) Plan"] feature of the Plan was activated. The 401(k) feature allows an eligible employee to contribute up to 10% of their annual compensation to the 401(k) Plan on a pre-tax basis. The 401(k) Plan is available to substantially all full-time employees who have completed one year of service. The Company, at its discretion, matches 100% of employee contributions up to 5% of their compensation. The 401(k) Plan allows participant investment direction of both employee and matching employer contributions from a variety of investment alternatives, one of which is the Company's common stock. All contributions made to the Plan prior to July 1, 2000, are fully vested and are held in a fund invested primarily in Company common stock. Morgan Stanley Dean Witter, FSB is the trustee of the 401(k) Plan. The Tandy Brands Accessories, Inc. Stock Purchase Program (the "Program") is open to all full-time employees who are enrolled in the Tandy Brands Accessories, Inc. Employees Investment Plan. Under the Program, participants may contribute 5% or 10% of their earnings, with the Company matching 50% of each participant's contribution. The Program also permits employees with six months to two years of service to participate in the Program with the Company matching 25% of each participant's contribution. The Program purchases treasury, if available (see Note 4), or unissued common stock directly from the Company at monthly average market prices. The participant's shares are fully vested upon purchase, the employee may withdraw at any time and the shares purchased under the Program are distributed to participants annually. Total Company contributions to these plans were approximately $1,406,000, $1,129,000 and $988,000 in fiscal 2000, 1999 and 1998, respectively. NOTE 12 - PREFERRED STOCK AND PREFERRED SHARE PURCHASE RIGHTS PREFERRED STOCK The Company's Board of Directors is authorized to approve the issuance of preferred stock without further stockholder approval. The Board of Directors of the Company is also authorized to determine, without any further action by the holders of the Company's common stock, the dividend rights, dividend rate, conversion or exchange rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms of any series of preferred stock, the number of shares constituting any series of preferred stock and the designation thereof. No shares of preferred stock have been issued. In connection with the adoption of its Preferred Share Purchase Rights Plan (the "Rights Plan"), the Company has designated and reserved for issuance upon exercise of such rights 150,000 shares of Series A Junior Participating Cumulative Preferred Stock. Should the Board of Directors elect to exercise its authority to issue any additional series of preferred stock, the rights, preferences and privileges of holders of the Company's common stock would be made subject to the rights, preferences and privileges of such additional series. PREFERRED SHARE PURCHASE RIGHTS Prior to the spin-off of the Company, the Board of Directors authorized the Rights Plan. In conjunction with the spin-off, each share of the Company's common stock was distributed with one preferred share purchase right (collectively, the "Rights") which entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of Series A Junior Participating Cumulative Preferred Stock at a price of $36 per one one-hundredth of a share, subject to adjustment. The Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all of the Company's stockholders. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's Board of Directors, except pursuant to an offer conditioned upon a substantial number of Rights being acquired. The description and terms of the Rights are set forth in a Rights Agreement between the Company and BankBoston N.A., as Rights Agent. On November 2, 1999, the Board of Directors renewed the Company's stockholder Rights Plan. A new amended and restated plan was adopted in the normal course of updating and extending the predecessor stockholder Rights Plan, which was scheduled to expire on December 31, 2000, and not in response to any acquisition proposal. The expiration date of the Rights Plan has been extended to October 19, 2009. The amended plan was altered to reflect prevailing stockholder Rights Plan terms, such as lowering the share ownership level which triggers the exercise of the Rights and eliminating the continuing director provision. The amended plan provides for an increase in the exercise price of the Rights under the plan from $36.00 to $70.00. Accordingly, the Company filed the amended and restated plan on Form 8-K with the Securities and Exchange Commission on November 2, 1999. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 13 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The Company sells its products to a variety of retail outlets, including mass merchants, national chain stores, major department stores, men's and women's specialty stores, catalog retailers, grocery stores, drug stores and the retail exchange operations of the United States military. The Company and its corresponding customer relationships are organized along men's and women's product lines. As a result, the Company has two reportable segments: (1) men's accessories consisting of belts, wallets, suspenders and other small leather goods and (2) women's accessories consisting of belts, wallets, handbags, socks, scarves, hats and hair accessories. General corporate expenses are allocated to each segment based on the respective segment's asset base. Depreciation and amortization expense related to assets recorded on the Company's corporate accounting records are allocated to each segment as described above. Management measures profit or loss on each segment based upon income or loss before taxes utilizing the accounting policies consistent in all material respects with those described in Note 1. No intersegment revenue is recorded. Information regarding operations and assets by segment are as follows:
YEAR ENDED JUNE 30, 2000 1999 1998 ------------ ------------ ------------ Revenue from external customers: Men's accessories .......................... $ 111,332 $ 105,909 $ 70,386 Women's accessories ........................ 78,619 72,464 64,665 ------------ ------------ ------------ $ 189,951 $ 178,373 $ 135,041 ============ ============ ============ Operating income (1): Men's accessories .......................... 14,296 13,769 8,370 Women's accessories ........................ 961 4,769 4,632 ------------ ------------ ------------ $ 15,257 $ 18,538 $ 13,002 ============ ============ ============ Interest expense ............................. (3,236) (3,011) (1,517) Other income (2) ............................. 1,717 135 176 ------------ ------------ ------------ Income before income taxes ................... $ 13,738 $ 15,662 $ 11,661 ============ ============ ============ Depreciation and amortization expense: Men's accessories .......................... $ 2,348 $ 2,190 $ 1,460 Women's accessories ........................ 1,169 945 530 ------------ ------------ ------------ $ 3,517 $ 3,135 $ 1,990 ============ ============ ============ Capital expenditures: Men's accessories .......................... $ 266 $ 957 $ 4,485 Women's accessories ........................ 1,573 266 1,680 Corporate .................................. 1,945 1,568 1,620 ------------ ------------ ------------ $ 3,784 $ 2,791 $ 7,785 ============ ============ ============ Total assets: Men's accessories .......................... $ 61,546 $ 63,261 $ 56,338 Women's accessories ........................ 45,948 45,281 39,445 Corporate .................................. 14,190 11,596 12,237 ------------ ------------ ------------ $ 121,684 $ 120,138 $ 108,020 ============ ============ ============
(1) Operating income consists of net sales less cost of sales and specifically identifiable selling, general and administrative expenses. (2) Other income includes royalty income on corporate tradenames, the early terminations of license agreements (see Note 8) and other income specifically identifiable to a segment. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES NOTE 14 - RELATED PARTY TRANSACTIONS During fiscal 2000, 1999 and 1998, the Company purchased inventory of approximately $41,775,000, $30,700,000 and $19,500,000, respectively, from a supplier who is a principal shareholder of the Company. The merchandise is purchased at amounts which approximate fair market value. Although the potential exposure for product flow interruption may be significant in the event of loss of such supplier, this exposure is mitigated in that the inventory may be purchased from various other sources. NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The summarized quarterly financial data (in thousands, except per share amounts) for the two years ended June 30, 2000, is set forth below:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- FISCAL 2000 Net sales ...................................... $ 53,256 $ 57,566 $ 39,686 $ 39,443 Gross profit ................................... 18,884 21,665 14,021 13,838 Income before income taxes(1) .................. 4,522 8,000 1,096 120 Net income ..................................... 2,768 4,893 671 317 Earnings per common share ...................... $ .48 $ .84 $ .12 $ .06 Earnings per common share-assuming dilution .... $ .47 $ .83 $ .12 $ .06 FISCAL 1999 Net sales ...................................... $ 44,281 $ 54,122 $ 38,247 $ 41,723 Gross profit ................................... 16,480 20,069 14,085 15,034 Income before income taxes ..................... 3,895 6,042 2,800 2,925 Net income ..................................... 2,384 3,678 1,715 1,940 Earnings per common share ...................... $ .42 $ .64 $ .30 $ .34 Earnings per common share-assuming dilution .... $ .41 $ .63 $ .29 $ .33
(1) Income before income taxes includes the net benefit realized from the early terminations of license agreements of $1,000,000 and $600,000 recognized during the second and third quarters of fiscal 2000, respectively. 24 REPORT OF INDEPENDENT AUDITORS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES To the Board of Directors of Tandy Brands Accessories, Inc. We have audited the accompanying consolidated balance sheets of Tandy Brands Accessories, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tandy Brands Accessories, Inc. and subsidiaries at June 30, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ EARNST & YOUNG LLP Fort Worth, Texas August 4, 2000 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES GENERAL Tandy Brands Accessories, Inc. (the "Company") is a leading designer, manufacturer and marketer of branded men's, women's and children's accessories, including belts and small leather goods such as wallets. The Company's product line also includes handbags, socks, scarves, hats, hair accessories and suspenders. The Company's merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary brand names, including DOCKERS(R), JONES NEW YORK(R), FLORSHEIM(R), PERRY ELLIS(R), ROLFS(R), HAGGAR(R), BUGLE BOY(R), CANTERBURY(R), PRINCE GARDNER(R), PRINCESS GARDNER(R), AMITY(R), DON LOPER(R), ACCESSORY DESIGN GROUP(R),TEX TAN(R) and TIGER(R), as well as private brands for major retail customers. The Company sells its products through all major retail distribution channels throughout the United States and Canada, including mass merchants, national chain stores, department stores, men's and women's specialty stores, catalogs, grocery stores and drug stores. During fiscal 2000, the Company announced the successful launch of a branded e-commerce web site that is available now at http://www.rolfs.net. Capturing strong consumer demand for this premier brand, the site features a full-line of personal leather goods, belts and other accessories in an easy-to-navigate and shop environment. The site was developed in coordination with Yahoo! Inc. Yahoo! Inc. is a global Internet media company and represented the first test of a direct-to-consumer presence for the Company. The Company seeks increased accessory sales and earnings through a variety of means, including increased sales through the Company's current operating units as well as growth through acquisition of similar businesses. During the first quarter of fiscal 2000, the Company purchased certain assets of Frank Spielberg Sales, LLC ("Spielberg"). See Note 2 to the consolidated financial statements. Sales and gross margin data from the Company's segments for fiscal 2000 compared to the previous two fiscal years were as follows:
YEAR ENDED JUNE 30, 2000 1999 1998 ------------ ------------ ------------ (Dollars in thousands) Net sales: Men's accessories ...................... $ 111,332 $ 105,909 $ 70,386 Women's accessories .................... 78,619 72,464 64,655 ------------ ------------ ------------ Total net sales ........................ $ 189,951 $ 178,373 $ 135,041 ============ ============ ============ Gross margin: Men's accessories ...................... $ 44,216 $ 42,110 $ 28,240 Women's accessories .................... 24,192 23,558 20,681 ------------ ------------ ------------ Total gross margin ..................... $ 68,408 $ 65,668 $ 48,921 ============ ============ ============ Gross margin as percentage of sales: Men's accessories ...................... 39.7% 39.8% 40.1% Women's accessories .................... 30.8% 32.5% 32.0% Total .................................. 36.0% 36.8% 36.2%
See Note 13 to the consolidated financial statements for certain other financial information with regard to the Company's men's and women's accessories segments. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FISCAL 2000 COMPARED TO FISCAL 1999 NET SALES Net sales increased $11.6 million, or 6.5%, in fiscal 2000 as compared to fiscal 1999. The overall increase was attributable to higher sales volume in existing men's product lines and sales from the purchase of assets of Spielberg. See Note 2 to the consolidated financial statements. Although the Company achieved consistent core growth in men's accessories, the overall sales increase did not offset decreases in women's small leather goods sales resulting in a 4.2% decrease in women's core product sales as compared to prior fiscal year. The lower than expected sales were caused primarily by a decline in small leather goods reorders by our customers as a result of soft holiday retail sales and decreased women's accessories trend item sales as compared to the same period last year. Additionally, sales were impacted by the discontinuation of business of several retail customers as a result of industry consolidation, store closures and bankruptcies, as well as delays in replenishment orders from a key mass merchant customer incurred during the fourth quarter of fiscal 2000. These sales pressures were primarily concentrated on our women's accessory business including our small leather goods, belts and trend item product categories. During fiscal 2000, the Spielberg handbag sales contributed $9.2 million to the overall $11.6 million sales increase which was offset partially by decreases in women's core business sales. The remaining sales increase was attributable to sales growth from the Company's existing men's businesses. GROSS MARGIN Gross margins increased $2.7 million, or 4.2%, in fiscal 2000 as compared to fiscal 1999. As a percentage of sales, gross margins decreased 0.8% in fiscal 2000 compared to fiscal 1999. This overall decrease was the result of a greater sales mix of mass merchant and private label handbag sales and larger inventory markdowns as compared to the prior fiscal year. Additionally, fiscal 2000 gross margins were impacted by inventory markdowns of approximately $1,651,000, as compared to $511,000 in fiscal 1999. Of the $1,651,000 fiscal 2000 inventory markdowns, $895,000 was recognized during the fourth quarter as compared to $265,000 in the same fourth quarter period in fiscal 1999. The markdowns related primarily to women's fashion trend items. Management closely monitors fashion trend items and anticipates additional inventory markdowns if market indicators in fashion trends justify further reserves. Men's and women's gross margins increased $2.1 million, or 5.0% and $0.6 million, or 2.7%, respectively, in fiscal 2000 as compared to fiscal 1999. As a percentage of sales, men's and women's gross margins decreased 0.1% and 1.7%, respectively, in fiscal 2000 as compared to fiscal 1999. The men's gross margin decrease was attributable to a higher sales mix of mass merchant sales compared to the prior year. The women's gross margin decrease was the result of the liquidation of JONES NEW YORK(R) handbag inventory due to the early termination of the JONES NEW YORK(R) license, increased sales of private label handbags (see Note 8 to the consolidated financial statements), higher mass merchant sales and inventory markdowns as compared to the same periods in the prior year. OPERATING EXPENSES Selling, general and administrative expenses increased $5.6 million, or 12.8%, in fiscal 2000. As a percentage of sales, selling, general and administrative expenses increased 1.4%. The increase resulted from the timing of the wind down of the JONES NEW YORK(R) handbag product line, the launch of the ROLFS(R) handbag line, increased advertising allowances as well as increased levels of selling, general and administrative expenses in anticipation of higher sales volume. Interest expense for the fiscal year ended 2000 increased $0.2 million, as compared to the same period for the prior year. The increase is primarily related to higher weighted-average interest rates as compared to the same period in the prior year. Depreciation and amortization expenses were approximately $3.5 million in fiscal 2000, compared to approximately $3.1 million in fiscal 1999. The 12.2% increase was primarily attributable to capital expenditures related to the Company's management information and distribution software systems installed during fiscal 1999 and the amortization of goodwill recorded in connection with the Spielberg acquisition. The effective tax rates for fiscal 2000 and fiscal 1999 were 37.0% and 38.0%, respectively. The effective tax rate in fiscal 2000 decreased due to a lower effective tax rate on state and local taxes. Net income for fiscal 2000 decreased 11.0% to $8,649,000, or $1.49 per diluted share, compared to net income of $9,717,000, or $1.67 per diluted share, for fiscal 1999. On March 3, 2000, and November 9, 1999, the Company negotiated an early termination of its JONES NEW YORK(R) women's handbag and small leather goods licensing agreements, respectively. See Note 8 to the consolidated financial statements. Excluding the net benefit of the early license termination realized during the second and third quarter of fiscal 2000, net income for the twelve months decreased 21.4% to $7,642,000, or $1.32 per diluted share, from the same period in the prior year. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES Net sales increased $43.3 million, or 32.1%, in fiscal 1999 as compared to fiscal 1998. The net sales increase during fiscal 1999 was primarily attributable to the purchase and acquisition transactions completed during the fourth quarter of fiscal 1998. See Note 2 to the consolidated financial statements. During fiscal 1999, the Amity/Rolfs and Tiger product lines contributed $38.2 million, or 88%, to the overall $43.3 million sales increase. The remaining 12%, or $5.1 million of the sales increase, was attributable to sales growth from the Company's existing men's and women's businesses. During fiscal 1999, net sales for men's and women's accessories increased 50.5% and 12.1%, respectively, as compared to fiscal 1998. As discussed above, the Amity/Rolfs and Tiger product lines contributed $31.1 million and $7.1 million to the fiscal 1999 men's and women's sales increases, respectively. GROSS MARGIN Gross margins increased $16.7 million, or 34.2%, in fiscal 1999 as compared to fiscal 1998. As a percentage of sales, gross margins increased 0.6% in fiscal 1999 compared to fiscal 1998. This overall increase was the result of greater sales volume in the Company's small leather goods product line which because of brand name ownership, carry a higher gross margin in comparison with the other product categories sold by the Company. Men's and women's gross margins increased $13.9 million, or 49.1%, and $2.8 million, or 13.9%, respectively, in fiscal 1999 as compared to fiscal 1998. As a percentage of sales, men's and women's gross margins decreased 0.3% and increased 0.5%, respectively, in fiscal 1999 as compared to fiscal 1998. The men's gross margin decrease was attributable to a higher mass merchant sales mix which were offset by gross margin increases in women's sales related to greater sales volume in the Company's small leather goods product line. OPERATING EXPENSES Selling, general and administrative expenses increased $10.1 million, or 29.7%, in fiscal 1999. However, selling, general and administrative expenses decreased 0.4% as a percentage of sales. A portion of this decrease was due to the successful integration of the Tiger Accessories, Inc. business and Amity/Rolfs product line during fiscal 1999. Interest expense for the fiscal year ended 1999 increased $1.5 million, as compared to the same period for the prior year. The increase is primarily related to higher debt levels as a result of the purchase of certain assets of Amity/Rolfs and the acquisition of Tiger Accessories, Inc. during the fourth quarter of fiscal 1998. Depreciation and amortization expenses were approximately $3.1 million in fiscal 1999, compared to approximately $2.0 million in fiscal 1998. The 57.5% increase was primarily attributable to depreciation expense and amortization related to the purchase of certain assets from AR Accessories Group, Inc., the acquisition of Tiger Accessories, Inc. and capital expenditures initiated at the end of fiscal 1998. The effective tax rates for fiscal 1999 and fiscal 1998 were 38.0% and 37.9%, respectively. The effective tax rate in fiscal 1999 increased due to additional state and local taxes. Net income for fiscal 1999 was $9.7 million, or $1.67 per diluted share, compared to $7.2 million, or $1.27 per diluted share in fiscal 1998. The 34.3% increase in net income was primarily attributable to the aforementioned sales increases, offset partially by increased depreciation and amortization expense and higher interest expense. LIQUIDITY AND CAPITAL RESOURCES During fiscal 2000, the Company's operating activities provided cash of $14.6 million compared to a use of cash of $3.8 million for fiscal 1999. The increase was attributable to timing of cash receipt collections related to increased sales, reduced inventory levels and cash receipts from the termination of the Company's JONES NEW YORK(R) handbag and small leather goods licensing agreements during fiscal 2000. The Company used cash for investing activities of $6.9 million in fiscal 2000 compared to $2.8 million in fiscal 1999. During the first quarter of fiscal 2000, the Company purchased certain assets of Frank Spielberg Sales, LLC using cash of $3.4 million. See Note 2 to the consolidated financial statements During fiscal 2000, the Company invested a total of $3.5 million in additional property and equipment. Capital expenditures for fiscal 2000 included leasehold improvements and equipment for a new distribution facility in Dallas, Texas, for women's accessories as well as additional hardware and software applications. See Note 2 to the consolidated financial statements for a discussion of the purchase of Frank Spielberg Sales, LLC. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES The Company's primary sources of liquidity for its various expenditures have been cash flows from operations and borrowings under bank credit arrangements. The Company has two unsecured bank credit lines aggregating $90 million which can be used for general corporate purposes including working capital requirements, acquisition activities and funding of letters of credit. See Note 5 to the consolidated financial statements. The Company also has a Canadian line of credit for approximately $525,000 secured by a letter of credit from a U.S. bank. As of June 30, 2000, the Company had credit availability under its credit facilities of approximately $40.8 million. The Company examines the carrying value of its excess of cost over net assets acquired (goodwill) and other intangible assets as current events and circumstances warrant to determine whether there are any impairment losses. If indicators of impairment were present in intangible assets used in operations and future cash flows were not expected to be sufficient to recover the assets' carrying amount, an impairment loss would be charged to expense in the period identified. No event has been identified that would indicate an impairment of the value of material intangible assets recorded in the consolidated financial statements. The Company has never paid a cash dividend on its common stock. The Company currently intends to retain its earnings for the foreseeable future to provide funds for the expansion of its business. The Company's existing credit agreements currently contain covenants related to the maintenance of certain financial ratios, which could impose certain limitations on the payment of dividends. See Note 4 to the consolidated financial statements for a discussion of the Company's stock repurchase program. The Company believes it has adequate financial resources and access to sufficient credit facilities to satisfy its future working capital needs. SEASONALITY The Company's quarterly sales and net income results are fairly consistent throughout the fiscal year, with a seasonal increase during the second quarter. INFLATION Although the Company's operations are affected by general economic trends, the Company does not believe that inflation has had a material effect on the operating results of the Company during the past three fiscal years. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this annual report contain forward- looking statements that are based on current expectations, estimates and projections about the industry in which the Company operates, management's beliefs and assumptions made by management. In addition, other written or oral statements which constitute forward-looking statements may be made by, or on behalf of, the Company. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 29 SELECTED FINANCIAL DATA ================================================================================ TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES (In thousands, except per share amounts)
YEAR ENDED JUNE 30, 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net sales .......................................................... $189,951 $178,373 $135,041 $102,507 $ 86,694 Gross profit ....................................................... 68,408 65,668 48,921 38,258 32,720 Intangible asset impairment write-off (1) .......................... -- -- -- -- 3,976 Operating income ................................................... 15,257 18,538 13,002 8,385 1,362 Interest expense ................................................... 3,236 3,011 1,517 1,242 1,267 Net income (2) ..................................................... 8,649 9,717 7,237 4,564 101 Net income per share: Earnings per share ............................................... $ 1.50 $ 1.70 $ 1.30 $ 0.84 $ 0.02 Earnings per share-assuming dilution ............................. $ 1.49 $ 1.67 $ 1.27 $ 0.83 $ 0.02 JUNE 30, 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital .................................................... $ 78,926 $ 80,847 $ 56,334 $ 43,354 $ 34,082 Total assets ....................................................... 121,684 120,138 108,020 65,364 58,411 Long-term debt ..................................................... 41,075 47,425 35,000 15,850 12,400 Stockholders' equity ............................................... 69,874 62,192 50,841 42,129 36,847
(1) Related to a write-off of intangible assets arising from the acquisition of Prince Gardner in fiscal 1994. (2) Net income includes the net pre-tax benefit arising from the early terminations of license agreements of $1,600,000 in fiscal 2000. PRICE RANGE OF COMMON STOCK Quoted by quarter for the two fiscal years ended June 30, 2000
FISCAL 2000 HIGH LOW September............ $17.50 $12.13 December............. $14.75 $12.63 March................ $14.75 $ 8.50 June................. $ 9.44 $ 6.00
FISCAL 1999 HIGH LOW September............ $20.38 $12.00 December............. $18.44 $11.00 March................ $17.75 $14.75 June................. $17.75 $13.25
As of August 7, 2000, there were approximately 1,148 stockholders of record. 30 CORPORATE INFORMATION ================================================================================ [PHOTO] TOP FROM LEFT: Mr. Stallings, Mr. Jenkins, Ms. Nicholas, BOTTOM FROM LEFT: Mr. Hemminghaus, Dr. Gaertner, Mr. Girouard, Mr. Rundell DIRECTORS Dr. James F. Gaertner Chairman of the Board Dean of the College of Business The University of Texas at San Antonio J.S.B. Jenkins President and Chief Executive Officer Tandy Brands Accessories, Inc. C.A. Rundell Private Investor Gene Stallings Collegiate and Professional Football Coach, Author and Private Investor Marvin J. Girouard President and Chief Executive Officer Pier 1 Imports, Inc. Colombe M. Nicholas Private Investor Roger R. Hemminghaus Chairman Emeritus Ultramar Diamond Shamrock OFFICERS J. S. B. Jenkins President and Chief Executive Officer Jerry W. Wood Executive Vice President Stanley T. Ninemire Senior Vice President and Chief Financial Officer W. Mike Baggett Secretary CORPORATE DATA Corporate Offices 690 East Lamar Boulevard Suite 200 Arlington, Texas 76011 (817) 548-0090 www.tandybrands.com Annual Meeting 9:00 a.m., October 17, 2000 Accessory Design Group Distribution Center 3631 West Davis Suite A Dallas, TX 75211 Common Stock Transfer Agent and Registrar Fleet National Bank Stock Inquiries: (781) 575-3120 Corporate Counsel Winstead Sechrest & Minick P.C. The Company's common stock is traded on the NASDAQ National Market System under the trading symbol TBAC. The Company's Form 10-K Report for the year ended June 30, 2000, as filed with the Securities and Exchange Commission, is available without charge upon request to Stanley T. Ninemire at the address of the Corporate Offices. 31 [GRAPHIC] [TANDY BRANDS LOGO] 690 East Lamar Boulevard Suite 200 Arlington, Texas 76011 817-548-0090 www.tandybrands.com EX-21.1 6 d80391ex21-1.txt SUBSIDIARIES OF THE REGISTRANT 1 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES EXHIBIT (21): SUBSIDIARIES OF THE REGISTRANT 21.1 List of subsidiaries
Subsidiaries of State or Other Jurisdiction of Names Under Which Such the Registrant Incorporation or Organization Subsidiaries Do Business - --------------- ------------------------------ ------------------------ Accessory Design Group, Inc. A Delaware Corporation Accessory Design Group, Inc. Accessory Design Group TBAC-Prince Gardner, Inc. A Delaware Corporation TBAC-Prince Gardner, Inc. Prince Gardner TBAC-AIS, Inc. A Delaware Corporation TBAC-AIS, Inc. H.A. Sheldon Canada Ltd. A Canadian Corporation 1088258 Ontario, Inc. H.A. Sheldon Canada Ltd. TBAC-Canterbury, Inc. A Delaware Corporation TBAC-Canterbury, Inc. Amity / Rolfs, Inc. A Delaware Corporation Amity / Rolfs, Inc. Tiger Accessories, Inc. A New York Corporation Tiger Accessories, Inc. TBAC General Management Co. A Nevada Corporation TBAC General Management Co. TBAC Investment, Inc. A Nevada Corporation TBAC Investment, Inc. TBAC Investment Trust A Pennsylvania Trust TBAC Investment Trust TBAC Management Co., L.P. A Delaware Limited Partnership TBAC Management Co., L.P. Tandy Brands Accessories Handbags, Inc. A Delaware Corporation Tandy Brands Accessories Handbags, Inc.
EX-23.1 7 d80391ex23-1.txt CONSENT OF ERNST & YOUNG LLP 1 TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES EXHIBIT (23): CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of Ernst & Young LLP CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Tandy Brands Accessories, Inc. of our report dated August 4, 2000, included in the 2000 Annual Report to Stockholders of Tandy Brands Accessories, Inc. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-41262, 33-46814, 33-91996, 33-75114, 333-8579, 333-94251 and 333-38526) of (i) our report dated August 4, 2000, with respect to the consolidated financial statements of Tandy Brands Accessories, Inc. included in the 2000 Annual Report to Stockholders of Tandy Brands Accessories, Inc. and (ii) our report dated August 4, 2000, with respect to the financial statement schedule included in this Annual Report on Form 10-K for the year ended June 30, 2000. /s/ ERNST & YOUNG LLP Fort Worth, Texas September 22, 2000 EX-27.1 8 d80391ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TANDY BRANDS ACCESSORIES, INC.'S JUNE 30, 2000, ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FILINGS. DOLLARS ARE IN THOUSANDS. YEAR JUN-30-2000 JUN-30-2000 661 0 32,206 1,101 55,340 89,477 22,317 9,305 121,684 10,551 41,075 0 0 5,809 64,065 121,684 189,951 189,951 121,543 121,543 3,517 0 3,236 13,738 5,089 8,649 0 0 0 8,649 1.50 1.49
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