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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998.
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 001-05647
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MATTEL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-1567322
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
333 Continental Boulevard
El Segundo, California 90245-5012
(Address of principal executive offices)
(310) 252-2000
(Registrant's telephone number)
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Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value (and the
associated New York Stock Exchange
Preference Share Purchase Rights) Pacific Exchange, Inc.
Depositary Shares, each representing one
twenty-fifth New York Stock Exchange
of a share of Series C Mandatorily
Convertible
Redeemable Preferred Stock
6 3/4% Senior Notes Due 2000 (None)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
(None)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 19, 1999 was $7,029,080,861.
Number of shares outstanding of registrant's common stock, $1.00 par value, as
of March 19, 1999: 286,171,231 shares
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Mattel, Inc. Annual Report to Stockholders for the year
ended December 31, 1998 (Incorporated into Parts I, II and IV).
2. Portions of the Mattel, Inc. 1999 Notice of Annual Meeting of Stockholders
and Proxy Statement, to be filed with the Securities and Exchange
Commission within 120 days after the close of the registrant's fiscal year
(Incorporated into Part III).
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PART I
Item 1. Business
Mattel designs, manufactures, and markets a broad variety of children's
products on a worldwide basis through both sales to retailers and direct to
consumers. The Company's business is dependent in great part on its ability
each year to redesign, restyle and extend existing core products and product
lines, to design and develop innovative new products and product lines, and to
expand its marketing capability. The Company plans to continue to focus on its
portfolio of brands which have fundamental play patterns and have historically
had worldwide appeal, have been sustainable, and have delivered consistent
profitability. The Company's portfolio of brands can be grouped in the
following four categories:
. Girls--including Barbie(R) fashion dolls and accessories, collector
dolls, software, Fashion Magic(R), American Girl(R), Cabbage Patch
Kids(R), and Polly Pocket(R);
. Infant and Preschool--including Fisher-Price(R), Disney preschool and
plush, Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna
Doodle(R), and View-Master(R);
. Entertainment--including Disney, Nickelodeon(R), games, and puzzles; and
. Wheels--including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing,
and Tyco(R) Radio Control.
Beginning in 1997, the Company began to take a number of important steps
designed to better position the Company for the future. In March 1997, the
Company completed its merger with Tyco Toys, Inc., which at the time was the
third largest toy company in the US. As a result of the merger, the Company
added the Matchbox(R), Tyco(R) Electric Racing, Tyco(R) Radio Control, Sesame
Street(R), Magna Doodle(R), and View-Master(R) brands to its portfolio. The
merger was accounted for as a pooling of interests, which means that for
accounting and financial reporting purposes, the two companies were treated as
if they had always been combined. In connection with the merger, the Company
also commenced a significant integration and restructuring plan, which has
since been substantially completed.
In June 1998, the Company acquired Bluebird Toys PLC, a company organized in
the United Kingdom, from which Mattel previously licensed the product designs
for its Polly Pocket(R) and Disney Tiny Collections brands, as well as the
Polly Pocket(R) trademarks. In July 1998, the Company completed its
acquisition of Pleasant Company, a Wisconsin-based direct marketer of books,
dolls, clothing, accessories and activity products included under the American
Girl(R) brand name.
Most recently, on December 13, 1998, the Company entered into a merger
agreement with The Learning Company, Inc. under which Learning Company will be
merged into the Company, with Mattel remaining as the surviving corporation.
Learning Company develops and publishes a broad range of high quality branded
consumer software for personal computers that educates across every age
category, from young children to adults and is one of the world's largest
consumer software companies. Learning Company's primary emphasis is in
education and productivity software, but it also offers a selection of
lifestyle and, to a lesser extent, entertainment products, both in North
America and internationally. The merger would add the Carmen Sandiego(TM),
Reader Rabbit(R), The Oregon Trail(R), National Geographic(R), American
Greetings(R), The Print Shop(R), Riven(R) and Myst(R) brands to the Company's
portfolio.
The completion of the merger depends on satisfying a number of conditions,
including the approval of the merger agreement by the stockholders of both
companies. It is expected that the merger will be accounted for as a pooling
of interests. The number of shares of Mattel common stock to be issued to
Learning Company's common and preferred stockholders, together with the Mattel
common stock to be issued upon the exchange of the exchangeable shares of
Learning Company's Canadian subsidiary, is expected to represent between
approximately 27% and 30% of Mattel's outstanding voting power after the
merger, depending on the actual exchange ratio at the time of the merger. See
"Risk Factors."
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As used herein, unless the context requires otherwise, "Mattel" or the
"Company" refers to Mattel, Inc. and its subsidiaries, and "Fisher-Price"
refers to Fisher-Price, Inc., a Delaware corporation and wholly-owned
subsidiary of Mattel.
Mattel was incorporated in California in 1948 and reincorporated in Delaware
in 1968. Its executive offices are located at 333 Continental Boulevard, El
Segundo, California 90245-5012, telephone (310) 252-2000.
Competition and Industry Background
Competition in the toy industry is based primarily on price, quality and
play value. In recent years, the toy industry has experienced rapid
consolidation driven, in part, by the desire of industry competitors to offer
a range of products across a broader variety of categories. In the US, the
Company competes with several large toy companies, including Hasbro, Inc., as
well as a number of smaller toy companies. The larger toy companies have
pursued a strategy of focusing on core product lines. Core product lines are
those lines that are expected to be marketed for an extended period of time,
and that historically have provided relatively consistent growth in sales and
profitability. By focusing on core product lines, toy manufacturers have been
able to reduce their reliance on new product introductions and the associated
risk and volatility. The juvenile products market, in which Fisher-Price is
one of the leading companies, is more fragmented.
The toy industry is also experiencing a shift toward greater consolidation
of retail distribution channels, such as large specialty toy stores and
discount retailers, including Toys R Us, Wal-Mart, Kmart and Target, which
have increased their overall share of the retail market. This consolidation
has resulted in an increased reliance among retailers on the large toy
companies because of their financial stability and ability to support products
through advertising and promotion and to distribute products on a national
basis. These retailers' growing acceptance of electronic data interchange has
provided toy manufacturers with an ability to more closely monitor consumers'
acceptance of a particular product or product line and has provided retailers
with the ability to more closely monitor their inventory levels.
Over the last ten years, toy companies based in the US have expanded their
international marketing and manufacturing operations. The Company believes a
strong international distribution system can add significantly to the sales
volume of core product lines and extend the life cycles of newly-developed
products.
Seasonality
Sales of toy products at retail are seasonal, with a majority of retail
sales occurring during the period from September through December.
Consequently, shipments of toy products to retailers are typically greater in
the third and fourth quarters than in each of the first and second quarters
combined. As the large toy retailers become more efficient in their control of
inventory levels, this seasonality increases. See "Risk Factors."
In anticipation of this seasonal increase in retail sales, the Company
significantly increases its production in advance of the peak selling period,
resulting in a corresponding build-up of inventory levels in the first three
quarters of the year. In addition, the Company and others in the toy industry
develop sales, advertising, promotion and merchandising programs with the
retailers to encourage them to purchase merchandise in periods other than the
peak holiday selling season. These programs, together with seasonal shipping
patterns, result in significant peaks in the third and fourth quarters in the
respective levels of inventories and accounts receivable, which result in
seasonal working capital financing requirements. See "Seasonal Financing."
In the fourth quarter of 1998, the Company experienced unanticipated
cutbacks in buying by retailers due to a continuing shift by these retailers
to just-in-time inventory management systems. See "Risk Factors." Under just-
in-time inventory management systems, retailers are timing reorders so that
they are being filled by suppliers closer to the time of purchase by
consumers, rather than maintaining large on-hand inventories to meet consumer
demand. To respond to such shifts, the Company took appropriate actions to
adjust its own shipping to more of a just-in-time pattern. As a result,
products that would have previously been shipped in advance of expected
consumer demand will be shipped closer to the time they are expected to be
purchased by the consumer.
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Products
The Company has historically achieved consistent sales and earnings growth
by focusing on a number of core brands supplemented by various new product
introductions. The Company's principal core brands are grouped in the
following four categories:
. Girls--including Barbie(R) fashion dolls and accessories, collector
dolls, software, Fashion Magic(R), American Girl(R), Cabbage Patch
Kids(R), and Polly Pocket(R);
. Infant and Preschool--including Fisher-Price(R), Disney preschool and
plush, Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna
Doodle(R), and View-Master(R);
. Entertainment--including Disney, Nickelodeon(R), games, and puzzles; and
. Wheels--including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing,
and Tyco(R) Radio Control.
Core brands are expected to be marketed for an extended period of time and
historically have provided relatively consistent growth in sales and
profitability. In order to provide greater flexibility in the manufacturing
and delivery of products, and as part of a continuing effort to reduce
manufacturing costs, the Company has concentrated production of most of its
core brands in Company-owned facilities and generally uses independent
contractors for the production of non-core products.
With respect to new product introductions, the Company's strategy is to
begin production on a limited basis until a product's initial success has been
proven in the marketplace. The production schedule is then modified to meet
anticipated demand. The Company further limits its risk by generally having
independent contractors manufacture new product lines in order to minimize
capital expenditures associated with new product introductions. This strategy
has reduced inventory risk and significantly limited the potential loss
associated with new product introductions.
New product introductions for 1998 included:
. Kelly(R) and Tommy(TM) dolls and their battery-operated Power Wheels(R)
vehicle
. Barbie(R) Riding Club and Barbie(R) Nail Designer(TM) CD-ROMS
. Barbie(R) Photo Designer Digital Camera with CD-ROM
. NASCAR(R) Barbie(R) doll
. Hot Wheels(R) Pro-Racing vehicles
. Hot Wheels Collectibles(R) vehicles for the adult collector
. Hot Wheels(R) Stunt Truck Driver(TM) CD-ROM
. Cabbage Patch Kids(R) 15th Anniversary doll, a reproduction of the doll
that started the 1983 craze
. the addition of a series of action figures and playsets based on the
Disney/Pixar movie "A Bug's Life"
. Bounce Around Tigger, battery-operated talking plush with bouncing
feature
. Fisher-Price(R) Prop 'N Carry(TM) infant carrier
. Fisher-Price(R) Rescue Heroes(TM) playset and action figures
. Fisher-Price(R) Shop & Cook(TM) kitchen playcenter
. Tyco(R) R/C Revolver(TM) and Tyco(R) R/C TMH Psycho(TM) radio control
vehicles
. Blue's Clues(TM) plush toys and puzzles based on Nickelodeon's popular
TV show
. Rugrats(TM) line of dolls, plush toys, games and puzzles based on
Nickelodeon's popular TV show and movie
. Reintroduction of the famous 1960 Chatty Cathy(TM) doll with pull-string
talking mechanism
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New product introductions planned for 1999 include:
. Intel Play(TM) line of PC-enhanced products
. Generation Girl(TM) Barbie(R) and friends that are positioned as trendy
teens with exciting adventures via dolls, books and CD-ROM
. Barbie(R) newborn baby sister Krissy doll
. Working Woman Barbie(R) CD-ROM with print features for letterhead,
business cards, labels and other office-themed activities
. Rosie O'Donnell doll
. Barbie CD-ROM programs for Nintendo Game Boy
. Barbie(R) Frankie Sinatra Gift Set
. Bob Mackie Porcelain Tango Barbie(R)
. Millenium Barbie(R) doll
. Hot Wheels(R) Ferrari products of various categories (Mattel is the
worldwide exclusive licensee)
. Hot Wheels(R) Formula One die cast vehicles
. Hot Wheels Collectibles(R) Jay Leno and Reggie Jackson car sets
. Hot Wheels(R) Crash CD-ROM game
. Hot Wheels(R) NBA vehicles with figures
. Pooh Friendly Place miniature playsets featuring Pooh and friends
. a line of action figures, plush toys, games, puzzles and collector dolls
based on the Disney/Pixar movie "Toy Story 2"
. Chat Pals(TM), a line of plush toys that "come to life" with microphone
and radio frequency technology
. Holiday Chatty Cathy(TM) doll
. Relaunch of Polly Pocket(R) line of dolls and playsets with themes for
the new millennium
. Polly Pocket(R) 3 1/2" doll with fashions
. NBA collectible figures
. Fisher-Price(R) Infant-to-Toddler Soothing Rocker
. Fisher-Price(R) Bounce 'n Play Activity Dome
. Fisher-Price(R) Child Locator
. Fisher-Price(R) 2-in-1 RC Truck(TM)
. Fisher-Price(R) Harley-Davidson(R) Power Wheels(R)
. Fisher-Price(R) Peaceful Planet(TM) line of toys
. Pleasant Company's Amelia(TM), a feisty, funny, make-believe author and
illustrator of Amelia's notebooks along with Amelia(TM) school supplies,
clothing and an interactive CD-ROM
. Bitty Baby(R) line of baby dolls with special outfits accompanied with
Bitty Bear(R) with poseable arms and legs
. History Mysteries(TM), a new line of suspenseful stories featuring 11-12
year old heroines who solve compelling mysteries at important times in
America's past.
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International Operations
Revenues from the Company's international operations represented
approximately 34% of total consolidated gross sales in 1998. Generally,
products marketed internationally are the same as those marketed domestically,
although some are developed or adapted for particular international markets.
The Company's products are sold directly in most European, Asian and Latin
American countries, and through agents and distributors in those countries
where the Company has no direct presence. See "Licenses and Distribution
Agreements." For a description of a number of the risks associated with the
Company's international operations, see "Risk Factors."
The strength of the US dollar relative to other currencies can significantly
affect the revenues and profitability of the Company's international
operations. From time to time, the Company enters into foreign currency
forward exchange and option contracts primarily as hedges of inventory
purchases, sales and other intercompany transactions denominated in foreign
currencies to limit the effect of exchange rate fluctuations on the results of
operations and cash flows. See "Financial Instruments." For financial
information by geographic area, see Note 8 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
Product Design and Development
Through its product design and development group, the Company regularly
refreshes, redesigns and extends existing product lines and develops
innovative new product lines. The Company's success is dependent on its
ability to continue this activity. See "Risk Factors." Product design and
development are principally conducted by a group of professional designers and
engineers employed by the Company.
License agreements with third parties permit the Company to utilize the
trademark, character, or product of the licensor in its product line. A
principal licensor is The Walt Disney Company, which licenses many of its
characters and entertainment properties for use on the Company's products. The
Company also has entered into license agreements with, among others:
Children's Television Workshop relating to its Sesame Street(R) properties;
Viacom International, Inc. relating to its Nickelodeon(R) properties; NBA
Properties, Inc. for master toy licenses for the NBA, WNBA and USA Basketball;
Ferrari for use of the Ferrari trademark; and Original Appalachian Artworks,
Inc. for Cabbage Patch Kids(R). A number of these licenses relate to product
lines that are significant to the Company's business and operations.
Independent toy designers and developers bring products to the Company and
are generally paid a royalty on the net selling price of products licensed by
the Company. These independent toy designers may also create different
products for other toy companies.
The Company devotes substantial resources to product design and development.
During the years ended December 31, 1998, 1997 and 1996, the Company spent
approximately $178 million, $156 million, and $147 million, respectively, in
connection with the design and development of products, exclusive of royalty
payments. See Note 10 to the Consolidated Financial Statements in the Annual
Report to Stockholders, incorporated herein by reference.
Advertising and Promotion
The Company supports its product lines with extensive advertising and
consumer promotions. Advertising continues at varying levels throughout the
year and peaks during the Christmas season. Advertising includes television
and radio commercials, and magazine and newspaper ads. Promotions include in-
store displays, coupons, merchandising materials and major events focusing on
products and tie-ins with various consumer product companies. To further
promote the Company and its products, the Company sponsors the attractions
"It's A Small World" at Disneyland and Walt Disney World and "Autopia" and
"Storybook Land" at Disneyland Paris under a ten and one-half year agreement
with The Walt Disney Company. The Company also participates in toy stores in
Disneyland, near Disneyland Paris and in the Disney Village Market Place near
Walt Disney World. Separately, a total of twenty-eight BARBIE Boutiques are
located in F.A.O. Schwarz toy stores, including the "BARBIE on Madison"
boutique at the F.A.O. Schwarz flagship store in New York City.
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In November 1998, the Company opened its first flagship store, American Girl
Place(TM), in Chicago featuring children's products from Pleasant Company.
During the years ended December 31, 1998, 1997 and 1996, Mattel spent
approximately $813 million (17.0% of net sales), $779 million (16.1% of net
sales) and $779 million (17.2% of net sales) respectively, on worldwide
advertising and promotion.
Marketing and Sales
The Company's products are sold throughout the world. In the US, the
Company's products are distributed directly to large retailers, including
discount and free-standing toy stores, chain stores, department stores, other
retail outlets and, to a limited extent, wholesalers. Discount toy stores
continue to increase their market share. During the year ended December 31,
1998, Wal-Mart and Toys R Us accounted for approximately 16.5% and 15.3%,
respectively, of worldwide consolidated net sales and were the only customers
accounting for 10% or more of consolidated net sales. See "Risk Factors."
The Company has also been focusing increasingly on direct-to-consumer sales,
through both its direct-to-consumer catalogue business and by taking advantage
of e-commerce over the Internet. During 1998, the Company introduced websites
that support its numerous core products. Consumers can purchase many of the
Company's products over the Internet, including Barbie(R) collector dolls,
Mattel Media(R) software products, and Hot Wheels(R) and Matchbox(R)
collectibles. The Company believes that increasing its focus on direct-to-
consumer sales will help to maximize sales of its products and create a better
balance between direct-to-consumer sales and sales to traditional retailers.
During 1998, the Company acquired Pleasant Company, a Wisconsin-based direct
marketer of products under the American Girl(R) brand name. The Company also
expects to be able to use the infrastructure provided by Learning Company to
take many of Mattel's brands directly to the consumer.
In general, the Company's major domestic and international customers review
its product lines and product concepts for the upcoming year at showings
beginning in late summer. The Company also participates in domestic and
international toy industry trade fairs in the first quarter of the year. In
the fourth quarter of 1998, the Company experienced unanticipated cutbacks in
buying by retailers due to a continuing shift by these retailers to just-in-
time inventory management systems. Under just-in-time inventory management
systems, retailers are timing reorders so that they are being filled by
suppliers closer to the time of purchase by consumers, rather than maintaining
large on-hand inventories to meet consumer demand. To respond to such shifts,
the Company took appropriate actions to adjust its own shipping to more of a
just-in-time pattern. As a result, products that would have previously been
shipped in advance of expected consumer demand will be shipped closer to the
time they are expected to be purchased by the consumer. Historically, the
greater proportion of shipments of products to retailers occurs during the
third and fourth quarters of the year. See "Seasonality" and "Risk Factors."
Through its marketing research departments, the Company conducts basic
consumer research and product testing and monitors demographic factors and
trends. This information assists the Company in evaluating consumer acceptance
of products, including whether there is increasing or decreasing demand for
its products.
The Company bases its production schedules on customer orders, modified by
historical trends, results of market research and current market information.
The actual shipments of products ordered and the order cancellation rate are
affected by consumer acceptance of the product line, the strength of competing
products, marketing strategies of retailers and overall economic conditions.
Unexpected changes in these factors can result in a lack of product
availability or excess inventory in a particular product line.
Manufacturing
The Company's products are manufactured in Company-owned facilities and by
independent contractors. Products are also purchased from unrelated entities
that design, develop and manufacture the products. In order to provide greater
flexibility in the manufacture and delivery of products, and as part of a
continuing effort to
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reduce manufacturing costs, the Company has concentrated production of most of
its core products in the Company's facilities and generally uses independent
contractors for the production of non-core products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Manufacturing Risk" in the Annual Report to Stockholders, incorporated herein
by reference.
Mattel's manufacturing facilities are located in the states of Kentucky,
Georgia, and Oregon, and in Mexico, China, Indonesia, Malaysia, Thailand and
Italy. The Company also utilizes independent contractors to manufacture
products in the US, Europe, Mexico, the Far East and Australia. To help avoid
disruption of its product supply due to political instability, civil unrest,
economic instability, changes in government policies and other risks, the
Company produces many of its key products in more than one facility.
All foreign countries in which the Company's products are manufactured
(principally China, Indonesia, Malaysia and Mexico) currently enjoy "normal
trade relations" ("NTR") status under US tariff laws, which provides a
favorable category of US import duties. As a result of continuing concerns in
the US Congress regarding China's human rights policies, and disputes
regarding Chinese trade policies, including the country's inadequate
protection of US intellectual property rights, there has been, and may be in
the future, opposition to the extension of NTR status for China.
The loss of NTR status for China would result in a substantial increase in
the import duty for toys manufactured in China and imported into the US and
would result in increased costs for the Company and others in the toy
industry. See "Risk Factors." The impact of such an event on the Company could
be somewhat mitigated by the Company's ability to source product for the US
market from countries other than China and ship products manufactured in China
to markets outside the US. As a result, the Company has expanded its
production capacity in other countries. Other factors, including the Company's
ability to pass along the added costs through price increases and the pricing
policies of vendors in China, could also mitigate the impact of a loss of
China's NTR status.
With the implementation of the Uruguay Round agreement effective January 1,
1995, all US duties on dolls and traditional toys were completely eliminated.
Canada also eliminated its tariffs on dolls and most toy categories in 1995,
with the exception of certain toy sets and board games that will have their
duties eliminated over ten years. Meanwhile, both the European Union and Japan
began implementing Uruguay Round tariff reductions that, by 1999, will lower
the tariffs on dolls by over 40% in the European Union and by 15% in Japan.
The European Union and Japan are fully eliminating tariffs on several other
toy categories over a period of ten years.
Commitments
In the normal course of business, the Company enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect the Company's right to create
and market certain products. Certain of these commitments routinely contain
provisions for guaranteed or minimum expenditures during the term of the
contracts. Current and future commitments for guaranteed payments reflect the
Company's focus on expanding its product lines through alliances with
businesses in other industries, such as television and motion picture
entertainment companies.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million. Licensing and similar
agreements with terms extending through the year 2003 contain provisions for
future guaranteed minimum payments aggregating approximately $371 million. In
addition, under a certain licensing agreement, the Company may have additional
commitments of up to $37.8 million in the year 2000 payable over three years.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Commitments" and Note 6 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
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Licenses and Distribution Agreements
License agreements with third parties permit the Company to utilize the
trademark, character or product of the licensor in its product line. The
Company's level of licensing activity has expanded in recent years. Royalty
expense during the years ended December 31, 1998, 1997 and 1996 was
approximately $201 million, $194 million and $155 million, respectively. See
"Product Design and Development" and Note 6 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
The Company distributes finished products that are independently designed
and manufactured. The Company also licenses a number of its trademarks,
characters and other property rights to others for use in connection with the
sale of non-toy and other products that do not compete with the Company's
products.
Financial Instruments
To limit the impact associated with the exposure to currency exchange rate
fluctuations, the Company enters into foreign currency forward exchange and
option contracts primarily to hedge its purchase of inventory, sales and other
intercompany transactions denominated in foreign currencies. These contracts
are intended to fix a portion of the Company's product cost and intercompany
cash flows, and thereby limit the effect of foreign currency fluctuations on
the Company's results of operations and cash flows. The Company does not trade
in financial instruments for speculative purposes.
For additional information regarding foreign currency contracts, see
"International Operations" above and Note 6 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
Seasonal Financing
The Company's financing of seasonal working capital typically grows
throughout the first half of the year and peaks in the third or fourth
quarter, when accounts receivable are at their highest due to increased sales
volume and Company sales programs, and when inventories are at their highest
in anticipation of expected second half sales volume. See "Seasonality." The
Company expects to finance its seasonal working capital requirements for the
coming year by using existing and internally generated cash, issuing
commercial paper, selling certain trade receivables and using various short-
term bank lines of credit. In addition, the Company avails itself of
individual short-term foreign credit lines with a number of banks, which will
be used as needed to finance seasonal working capital requirements of certain
foreign affiliates.
The Company maintains and periodically amends or replaces an unsecured
committed revolving credit agreement with a commercial bank group that is used
as the primary source of financing the seasonal working capital requirements
of its domestic and certain foreign affiliates. The agreement in effect during
1998 consisted of a committed unsecured facility providing a total of $1.0
billion in seasonal financing. Within the facility, up to $700.0 million was a
standard revolving credit line available for advances and backup for
commercial paper issuances (a five-year facility that expires in 2003).
Interest was charged at various rates selected by the Company, ranging from
market commercial paper rates to the bank reference rate. The remaining $300.0
million (a five-year facility that expires in 2003) was available for
nonrecourse purchases of certain trade accounts receivable of the Company by
the commercial bank group providing the credit line. The agreement required
the Company to comply with certain financial covenants for consolidated debt-
to-capital and interest coverage, and the Company was in compliance with such
covenants during 1998. This agreement will continue to be in effect during
1999. In addition, the Company avails itself of uncommitted domestic
facilities provided by certain banks to issue short-term money market loans.
The Company believes the amounts available under its committed revolving
credit facility, its uncommitted money market facility and its foreign credit
lines will be adequate to meet its seasonal financing requirements.
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Raw Materials
Virtually all of the Company's raw materials are available from numerous
suppliers. Pricing is relatively low and stable due to excess capacities
resulting from the Asian business crises.
The Company believes that, as large companies that sell various materials
continue to consolidate, less efficient plants will be closed reducing
availability. However, this should have little impact on the Company in 1999.
Trademarks, Copyrights, and Patents
Most of the Company's products are sold under trademarks, trade names and
copyrights and a number of those products incorporate patented devices or
designs. Trade names and trademarks are significant assets of the Company in
that they provide product recognition and acceptance worldwide.
The Company customarily seeks patent, trademark or copyright protection
covering its products, and it owns or has applications pending for US and
foreign patents covering many of its products. A number of these trademarks
and copyrights relate to product lines that are significant to the Company's
business and operations. The Company believes its rights to these properties
are adequately protected but there can be no assurance that its rights can be
successfully asserted in the future or will not be invalidated, circumvented
or challenged. See "Risk Factors."
The Company also licenses a number of its trademarks, characters and other
property rights to others for use in connection with the sale of non-toy and
other products that do not compete with the Company's products.
Government Regulations
The Company's products are subject to the provisions of the Consumer Product
Safety Act, the Federal Hazardous Substances Act and the Flammable Fabrics
Act, and the regulations promulgated thereunder. The Consumer Product Safety
Act and the Federal Hazardous Substances Act enable the Consumer Product
Safety Commission to exclude from the market consumer products that fail to
comply with applicable product safety regulations or otherwise create a
substantial risk of injury, and articles that contain excessive amounts of a
banned hazardous substance. The Flammable Fabrics Act enables the Consumer
Product Safety Commission to regulate and enforce flammability standards for
fabrics used in consumer products. The Consumer Product Safety Commission may
also require the repurchase by the manufacturer of articles that are banned.
Similar laws exist in some states and cities and in various international
markets. See "Item 3. Legal Proceedings"
Fisher-Price's car seats are subject to the provisions of the National
Highway Transportation Safety Act, which enables the National Highway Traffic
Safety Administration to promulgate performance standards for child restraint
systems. Fisher-Price conducts periodic tests to ensure that its child
restraint systems meet applicable standards. A Canadian agency, Transport
Canada, also regulates child restraint systems sold for use in Canada. As with
the Consumer Product Safety Commission, the National Highway Transportation
Safety Administration and Transport Canada can require the recall and
repurchase or repair of products that do not meet their respective standards.
The Company maintains a quality control program to ensure product safety
compliance with the various federal, state and international requirements.
The Company is subject to various other federal, state and local laws and
regulations applicable to its business. The Company believes that it is in
substantial compliance with these laws and regulations.
Effects of Inflation
Inflation rates in the US and in major foreign countries where the Company
does business have not had a significant impact on its results of operations
or financial condition during the three years ended December 31, 1998. The US
Consumer Price Index increased 1.6% in 1998, 1.7% in 1997 and 3.3% in 1996.
The Company
10
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receives some protection from the impact of inflation from high turnover of
inventories and its ability to pass on higher prices to customers.
Employees
The total number of persons employed by the Company and its subsidiaries at
any one time varies because of the seasonal nature of its manufacturing
operations. At December 31, 1998, the Company's total number of employees,
including its international operations, was approximately 29,000. Headcount at
December 31, 1998 increased over the amount reported at year-end 1997 due the
addition of employees of acquired companies and employees at our new
manufacturing facilities in Thailand, Indonesia and Mexico.
Risk Factors
This Risk Factors section is written to be responsive to the Security and
Exchange Commission's recently enacted "Plain English" guidelines. In this
section the words "we", "our", "ours" and "us" refer only to Mattel, Inc. and
its subsidiaries and not any other person.
We may not realize the expected benefits from the merger with Learning
Company, such as cost savings, operating efficiencies, revenue enhancements
and other synergies, due to difficulties integrating Mattel and Learning
Company.
We entered into the merger agreement with Learning Company with the
expectation that the merger will result in a number of benefits, including
cost savings, operating efficiencies, revenue enhancements and other
synergies. Integrating the operations and personnel of Mattel and Learning
Company will be a complex process, and we cannot assure you that the
integration will be completed rapidly or will result in the realization of the
anticipated benefits of the merger. The successful integration of the two
companies will require, among other things, integration of their sales and
marketing groups and coordination of their research and development efforts.
The diversion of the attention of our management and any difficulties
encountered in the process of combining the companies could cause the
disruption of, or a loss of momentum in, the activities of our business.
Further, the process of combining the companies could negatively affect
employee morale and our ability to retain some key employees after the merger.
In addition, the announcement and completion of the merger could cause
customers to delay or change orders for Learning Company's products as a
result of uncertainty over the integration of its software products. The
inability to successfully integrate the operations and personnel of the
companies, or any significant delay in achieving integration, could have a
material adverse effect on our business, financial condition and results of
operations after the merger.
As a result of the merger, we will incur transaction costs that may exceed our
estimates and significant consolidation and integration expenses that we
cannot accurately estimate at this time.
We estimate that, as a result of the merger, Mattel and Learning Company
will incur aggregate transaction costs of approximately $75 million to $85
million, including investment banking, legal and accounting fees, and
contractual incentive benefits. In addition, we expect that we will incur
significant consolidation and integration expenses which we cannot accurately
estimate at this time. We expect to charge the majority of such costs and
expenses to operations in fiscal 1999. The amount of the transaction costs is
a preliminary estimate and is subject to change. Actual transaction costs may
substantially exceed our estimates and, when combined with the expenses
incurred in connection with the consolidation and integration of the
companies, could have an adverse effect on our financial condition and results
of operations.
Many of our significant customers have shifted to just-in-time inventory
management systems, which may limit our ability to accurately forecast
reorders of our products by retailers and reduce or delay sales of our
products.
Many of our significant customers have recently shifted to "just-in-time"
inventory management systems to track sales of particular products. Such
customers are timing reorders so that they are being filled by suppliers
11
<PAGE>
closer to the time of purchase by consumers, rather than maintaining large on-
hand inventories to meet consumer demand. While these systems reduce a
retailer's investment in inventory, they increase pressure on suppliers like
us to fill orders promptly and shift a significant portion of inventory risk
and carrying costs to the supplier. These systems may also limit our ability
to accurately forecast reorders and create potential volatility in our
operating results. The limited inventory carried by retailers may also reduce
or delay retail sales. This in turn could impair our ability to obtain
reorders of our products in quantities necessary to permit us to achieve
planned sales and income growth. In addition, we may be required to incur
substantial additional expenses to fill late reorders in order to ensure that
our products are available at retail locations prior to the peak holiday
buying season. The failure of anticipated reorders to materialize could have a
material adverse effect on our business, financial condition and results of
operations. The recent shift to just-in-time inventory management by one of
our largest customers, Toys R Us, Inc., resulted in an approximately $250
million decrease in our net sales in 1998 as compared to 1997. Because many of
our customers have only recently shifted to just-in-time inventory management
systems, the full impact of this shift is uncertain. It is not clear if more
of our customers will shift to just-in-time inventory management systems or
the extent to which those retailers that have shifted will ultimately reduce
their overall inventories of our products.
The toy business is seasonal and therefore our annual operating results will
depend, in large part, on our sales during the relatively brief holiday
season.
Sales of toy products at retail are seasonal, with a majority of retail
sales occurring during the period from September through December. This
seasonality is increasing as large toy retailers become more efficient in
their control of inventory levels through the just-in-time inventory
management systems described in the preceding paragraph. As a result, our
annual operating results will depend, in large part, on our sales during the
relatively brief holiday season. This seasonal pattern requires significant
use of working capital mainly to manufacture inventory during the year, prior
to the holiday season, and requires accurate forecasting of demand for
products during the holiday season. Failure to accurately predict and respond
to consumer demand may have a material adverse effect on our business,
financial condition and results of operations.
Our business is dependent on our two largest customers, which together
accounted for approximately 31.8% of Mattel's net sales in fiscal 1998.
A small number of our customers account for a large share of our net sales.
For the year ended December 31, 1998, Wal-Mart Stores, Inc. accounted for
approximately 16.5% of our net sales, Toys R Us, Inc. accounted for
approximately 15.3% of net sales, and our ten largest customers in the
aggregate accounted for approximately 52.9% of net sales. If some of these
customers were to cease doing business with us, or to significantly reduce the
amount of their purchases from us, it could have a material adverse effect on
our business, financial condition and results of operations.
Consumer preferences are difficult to predict and the introduction of new
products is critical in the toy industry.
Our business and operating results depend largely upon the appeal of our
products. Our continued success in the toy industry will depend on our ability
to redesign, restyle and extend our existing core products and product lines
and to develop, introduce and gain customer acceptance of new products and
product lines. However, consumer preferences in the toy industry are
continuously changing and are difficult to predict. Individual products
typically have short life cycles. There can be no assurance that:
. any of our current toy products or product lines will continue to be
popular for any significant period of time;
. any new products and product lines introduced by us will achieve an
adequate degree of market acceptance; or
. any new products' life cycles will be sufficient to permit us to recover
development, manufacturing, marketing and other costs of the products.
12
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A decline in the popularity of our existing toy products and product lines or
the failure of new toy products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have a material
adverse effect on our business, financial condition and results of operations.
Our sales and manufacturing operations outside the US subject us to risks
normally associated with international operations.
For the year ended December 31, 1998, our international gross sales
comprised approximately 34% of our total consolidated gross sales. We expect
our international sales to continue to account for a significant and growing
portion of our revenues. Additionally, we own and operate manufacturing
facilities and utilize third-party manufacturers principally in China,
Indonesia, Malaysia and Mexico. Such sales and manufacturing operations are
subject to the risks normally associated with international operations,
including:
. currency conversion risks and currency fluctuations;
. limitations, including taxes, on the repatriation of earnings;
. political instability, civil unrest and economic instability;
. greater difficulty enforcing intellectual property rights and weaker
laws protecting such rights;
. greater difficulty and expense in conducting business abroad;
. complications in complying with foreign laws and changes in governmental
policies;
. transportation delays and interruptions; and
. the imposition of tariffs.
These risks could negatively impact our international sales and manufacturing
operations, which could have a material adverse effect on our business,
financial condition and results of operations.
All foreign countries in which our products are manufactured currently enjoy
"normal trade relations" status under US tariff laws, which provides a
favorable category of US import duties. As a result of continuing concerns in
the US Congress regarding China's human rights policies, and disputes
regarding Chinese trade policies, including the country's inadequate
protection of US intellectual property rights, there has been, and may be in
the future, opposition to the extension of "normal trade relations" status for
China. The loss of "normal trade relations" status for China would result in a
substantial increase in the import duty of toys manufactured in China and
imported into the US and would result in increased costs. Such increases in
import duties and costs could have a material adverse effect on our business,
financial condition and results of operations.
We are dependent on our intellectual property rights and we cannot assure you
that we will be able to successfully protect such rights.
We rely on a combination of trade secret, copyright, trademark, patent and
other proprietary rights laws to protect our rights to valuable intellectual
property related to our core brands. We also rely on license and other
agreements to establish ownership rights and to maintain confidentiality. We
cannot assure you that such intellectual property rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.
Technological developments and the Internet may create new risks to our
ability to protect our intellectual property. In addition, laws of certain
foreign countries in which our products may be sold do not protect
intellectual property rights to the same extent as the laws of the US. The
failure to protect our proprietary information and any successful intellectual
property challenges or infringement proceedings against us could have a
material adverse effect on our business, financial condition and results of
operations.
13
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Executive Officers of the Registrant
The current executive officers of the Company, all of whom are appointed
annually by the board of directors and serve at the pleasure of the board, are
as follows:
<TABLE>
<CAPTION>
Executive
Officer
Name Age Position Since
---- --- -------- ---------
<C> <C> <S> <C>
Jill E. Barad............... 47 Chairman of the Board and 1984
Chief Executive Officer
Pleasant T. Rowland......... 58 Vice Chairman of the Board and 1998
President, Pleasant Company
Astrid Autolitano........... 60 President, Mattel 1996
International
Matthew C. Bousquette....... 40 President, Boys/Entertainment 1999
Adrienne Fontanella......... 40 President, Girls/Barbie 1999
Neil B. Friedman............ 51 President, Fisher-Price brands 1999
Joseph C. Gandolfo.......... 56 President, Worldwide 1990
Manufacturing Operations and
a Director of Mattel, Inc.
David Haddad................ 36 President, Mattel Media 1999
Ned Mansour................. 50 President, Corporate 1992
Operations, General Counsel
and a Director of Mattel,
Inc.
Harry J. Pearce............. 54 Chief Financial Officer 1997
Francesca Luzuriaga......... 44 Executive Vice President, 1995
Worldwide Business Planning
and Resources
Kevin M. Farr............... 41 Senior Vice President and 1996
Corporate Controller
William Stavro.............. 59 Senior Vice President and 1993
Treasurer
</TABLE>
Ms. Barad has been Chairman of the Board and Chief Executive Officer since
October 1997 and a member of the Board of Directors since November 1991. From
January 1997 to October 1997, she was President and Chief Executive Officer.
From August 1992 until December 1996, she was President and Chief Operating
Officer. From December 1989 until August 1992, she was President, Mattel USA.
Prior to that she served in various executive positions in the Marketing,
Product Design and Product Development areas.
Ms. Rowland has been Vice Chairman of the Board and President, Pleasant
Company since July 1998. Ms. Rowland has been President of Pleasant Company
since 1986 when she founded that company.
Ms. Autolitano has been President, Mattel International since September
1996. From August 1995 to September 1996, she served as Executive Vice
President-Latin America and Mexico. From December 1989 to August 1995, she
served as Senior Vice President-Latin America and Mexico.
Mr. Bousquette has been President, Boys/Entertainment since March 1999. From
May 1998 to March 1999, he was Executive Vice President and General Manager-
Boys Toys. From 1995 to 1998, he was General Manager. He joined Mattel in
December 1993, as Senior Vice President-Marketing for Activity Toys, and had
previously worked for the Company from 1984 to 1988 in Boys Toys marketing.
Ms. Fontanella has been President, Girls/Barbie since March 1999. From
November 1998 to March 1999, she was General Manager and Senior Vice
President-Worldwide Barbie Licensing and Collectibles. From February to
November 1998, she was Senior Vice-President-Worldwide Barbie New Licensing
Venture. She joined Mattel in May 1996 as Vice President. Prior to joining
Mattel, she held senior positions within the cosmetics industry, including
chairman of January Productions from 1995 to 1996.
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Mr. Friedman has been President, Fisher-Price brands since March 1999. From
August 1996 to March 1999, he was President-Tyco Preschool. For more than five
years prior to that time, he was President of MCA/Universal Merchandising and
President of Aviva/Hasbro.
Mr. Gandolfo has been President, Worldwide Manufacturing Operations since
April 1990 and a member of the Board of Directors since May 1997.
Mr. Haddad has been President, Mattel Media since March 1999. From August
1997 to March 1999, he served as General Manager-Mattel Media and Senior Vice-
President-Barbie Collectibles. From July 1991 to August 1997, he was with The
Walt Disney Company, where he held a number of positions within the publishing
unit.
Mr. Mansour has been President, Corporate Operations and a member of the
Board of Directors since August 1996. He has been General Counsel since
November 1997. From April 1991, he served in several senior managerial
positions at Mattel, including President, Mattel-USA, Chief Administrative
Officer and Secretary.
Mr. Pearce has been Chief Financial Officer since May 1997. From 1973 to May
1997, he served as Chief Financial Officer of Tyco Toys, Inc. In 1993, he was
also named Vice Chairman of Tyco Toys, Inc.
Ms. Luzuriaga has been Executive Vice President, Worldwide Business Planning
and Resources since May 1997. From December 1995 to May 1997, she served as
Executive Vice President and Chief Financial Officer. From March 1989 to
December 1995, she served in several senior managerial positions at Mattel,
including Controller, Treasurer and Executive Vice President Finance.
Mr. Farr has been Senior Vice President and Corporate Controller since
September 1996. From June 1993 to September 1996, he served as Vice President,
Tax. Prior to that he served as Senior Director, Taxes from August 1992 to
June 1993.
Mr. Stavro has been Senior Vice President and Treasurer since May 1995. From
November 1993 to May 1995, he was Vice President & Treasurer. From March 1992
to November 1993, he was Vice President & Assistant Treasurer. Prior to that
he was Assistant Treasurer for more than five years.
Item 2. Properties
The Company owns its corporate headquarters in El Segundo, California,
consisting of 335,000 square feet, which is subject to a $45.0 million
mortgage, and an adjacent 55,000 square foot office building. The Company also
leases buildings in El Segundo consisting of approximately 250,000 square
feet, which are primarily used for its design and development and audio visual
departments. Fisher-Price owns its headquarters facilities in East Aurora, New
York, consisting of approximately 390,000 square feet. Pleasant Company owns
its headquarters facilities in Middleton, Wisconsin, consisting of
approximately 395,000 square feet.
The Company maintains sales offices in California, Illinois, New York, North
Carolina and Texas, and warehouse and distribution facilities in California,
Georgia, Indiana, Kentucky and Texas. The Company owns a computer facility in
Phoenix, Arizona. Internationally, the Company has its principal offices
and/or warehouse space in Australia, Canada, France, Hong Kong, Italy, Mexico,
The Netherlands, and the United Kingdom. The Company's principal manufacturing
facilities are located in China, Indonesia, Italy, Malaysia, Mexico, Thailand
and the US. See "Manufacturing."
Most of the Company's facilities are occupied under leases and, for the most
part, are fully utilized, although excess manufacturing capacity exists from
time to time based on product mix and demand. With respect to leases that are
scheduled to expire during the next twelve months, the Company may negotiate
new lease agreements, renew leases or utilize alternative facilities. See Note
6 to the Consolidated Financial Statements in the Annual Report to
Stockholders, incorporated herein by reference.
15
<PAGE>
Item 3. Legal Proceedings
Power Wheels(R) Recall and Related Matters
On October 22, 1998, the Company announced that Fisher-Price, in cooperation
with the Consumer Product Safety Commission, would conduct a voluntary recall
involving up to 10 million battery-powered Power Wheels(R) ride-on vehicles.
The recall did not result from any serious injury, and involves the
replacement of electronic components that may overheat, particularly when
consumers make alterations to the product. The recall involves vehicles sold
nationwide since 1984 under nearly 100 model names.
As a result of the voluntary recall, in September 1998, the Company
recognized a $38.0 million pre-tax ($27.2 million after-tax) charge. The
Company believes the amount reserved will be sufficient to cover all costs
associated with the recall.
Greenwald Litigation and Related Matters
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025
008) against the Company in Superior Court of the State of California, County
of Los Angeles. Ms. Greenwald is a former employee whom the Company terminated
in July 1995. Her complaint sought $50 million in general and special damages,
plus punitive damages, for breach of oral, written and implied contract,
wrongful termination in violation of public policy and violation of California
Labor Code Section 970. Ms. Greenwald claimed that her termination resulted
from complaints she made to management concerning general allegations that the
Company did not account properly for sales and certain costs associated with
sales and more specific allegations that the Company failed to account
properly for certain royalty obligations to The Walt Disney Company. On
December 5, 1996, the Company's motion for summary adjudication of Ms.
Greenwald's public policy claim was granted. On March 7, 1997, the Company
filed a motion for summary judgment on the remaining causes of action. On
December 9, 1997, the Company's motion for summary judgment of Ms. Greenwald's
remaining claims was granted. On February 4, 1998, Ms. Greenwald filed a
notice of appeal. Ms. Greenwald's opening brief on appeal is due on March 23,
1999. The Company intends to defend the action vigorously, including her
appeal.
Toys R Us and Related Matters
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc.
(FTC Docket No. 9278). The administrative law judge made findings of fact and
conclusions of law that the toy retailer Toys R Us, Inc. had violated federal
antitrust laws and entered into vertical and horizontal arrangements with
various toy manufacturers, including Mattel, whereby the manufacturers would
refuse to do business with warehouse clubs, or would do business with
warehouse clubs only on terms acceptable to Toys R Us. On October 13, 1998,
the Federal Trade Commission issued an opinion and a final order affirming the
findings and conclusions of the administrative law judge. Toys R Us has now
filed a notice of appeal in the United States Court of Appeals for the Seventh
Circuit.
Following the announcement of the administrative law judge's decision, the
Company was named as a defendant, along with certain other toy manufacturers,
in a number of antitrust actions in various states related to the Toys R Us
matter. On October 2, 1997, the Attorney General of the State of New York
filed in the United States District Court, Eastern District of New York (Case
No. CV 97 5714), an action against Toys R Us and certain toy manufacturers,
including the Company, seeking treble damages, expenses and attorneys' fees,
on behalf of all natural persons in the State of New York who purchased toy
products from retailers from 1989 to the present. The complaint alleges that
Toys R Us orchestrated an illegal conspiracy with various toy manufacturers,
including the Company, to cut off supplies of popular toys to warehouse clubs
and low margin retailers that compete with Toys R Us. The attorneys general
from forty-three other states, the District of Columbia and the Commonwealth
of Puerto Rico joined this action on or about November 17, 1997.
Following the filing of the New York action, a series of private treble
damage class actions under the federal antitrust laws have been filed in
various federal district courts. The Company is aware of a total of twenty-
seven
16
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actions which are currently pending and name Mattel as a defendant: fourteen
actions in the United States District Court, District of New Jersey; five
actions in the United States District Court, Northern District of California;
one action in the United States District Court, District of Illinois; one
action in the United States District Court, District of Maryland; one action
in the United States District Court, District of Vermont; and five actions in
the United States District Court, Eastern District of New York. While the
allegations and relief sought are substantially the same as those in the New
York action, the defendants differ from action to action, as does the alleged
conspiracy period. On January 23, 1998, at a hearing before the Judicial Panel
on Multidistrict Litigation, the parties agreed to have these related actions
transferred to the Eastern District of New York before the Honorable Nina
Gershon. A transfer order was issued by the Judicial Panel on Multidistrict
Litigation on February 11, 1998.
Since May 1998, Mattel has participated in settlement negotiations conducted
with the aid of the Honorable Charles B. Renfrew, a former United States
District Judge. Judge Renfrew was appointed to serve as a mediator in Wilson
v. Toys R Us, No. CV 96-574 (Tuscaloosa County, Alabama). His appointment has
been broadened by agreement to include all of the parens patriae state actions
described above, and all of the named class plaintiffs actions, including
state actions in California and Alabama, and each of the defendants. The
Company has entered into an agreement in principle to settle each of the
actions subject to mediation before Judge Renfrew, and is awaiting the
submission of a Final Settlement Agreement and Release for execution. The
settlement agreement will require a preliminary approval by the United States
District Court, Eastern District of New York, as transferee court in what has
been designated as MDL 1211, In re Toys R Us Antitrust Litigation, and will be
subject to final court approval pending class notice.
The Company is also aware of four class action complaints filed in state
court in California naming Toys R Us as a defendant and the Company and
various other toy manufacturers as nondefendant co-conspirators. These actions
have been coordinated in Superior Court of the State of California, County of
Alameda, and allege violations of state antitrust laws, seek unspecified
damages and are based on substantially similar allegations to those in the
Federal Trade Commission administrative proceeding. On February 2, 1999, the
Company was added as a party defendant pursuant to a Second Amended and
Restated Class Action Complaint filed in the Circuit Court for Tuscaloosa
County, Alabama. The allegations are substantially similar to those contained
in the above-described state class action complaints, and those of the Federal
Trade Commission administrative proceeding. It is anticipated that this action
will be disposed of as part of the settlement agreement that will result from
the mediation proceeding before Judge Renfrew.
Pursuant to the mediation proceeding before Judge Renfrew, all proceedings,
including those in state court, have been stayed pursuant to stipulation and
order. It is anticipated that a settlement agreement disposing of all of the
above discussed matters will be executed within 60-90 days, subject to court
approval. Until such time as these matters are concluded by the entry of
appropriate court orders, the Company intends to vigorously defend the
litigation in which it is named involving Toys R Us.
In connection with the proposed settlement agreement, the Company recognized
a $6.0 million pre-tax charge in the fourth quarter of 1998. The proposed
settlement agreement calls for the Company to make cash and toy contributions
prior to November 1999.
Environmental
Fisher-Price. Fisher-Price has executed a consent order with the State of
New York involving a remedial action/feasibility study for voluntary cleanup
of contamination at one of its manufacturing plants. The ultimate liability
associated with this cleanup presently is estimated to be less than
$1,425,000, approximately $1,010,500 of which has been incurred through
December 31, 1998.
Beaverton, Oregon. The Company operates a manufacturing facility on a leased
property in Beaverton, Oregon that was acquired as part of the Tyco merger. In
March 1998, samples of groundwater used by the facility for process water and
drinking water disclosed elevated levels of certain chemicals, including
trichloroethylene
17
<PAGE>
("TCE"). The Company immediately closed the water supply and self-reported the
sample results to the Oregon Department of Environmental Quality ("DEQ") and
Oregon Health Division. The Company also implemented an employee communication
and medical screening program.
In November 1998, the Company and another potentially responsible party
entered into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the facility, to propose an interim
remedial action measure and to continue the community outreach program to
employees, former employees and surrounding landowners. It is not presently
possible to estimate the cost to the Company related to the DEQ's
investigation and any subsequent orders for future work.
Litigation Related to Pending Business Combination
On December 16, 21, and 23, 1998, several stockholders of Learning Company
filed six separate purported class action complaints in the Court of Chancery
of the State of Delaware in and for New Castle County against Learning Company
and Learning Company's board of directors for alleged breaches of fiduciary
duties in connection with the proposed merger. The six complaints have since
been consolidated. The consolidated complaint seeks the certification as a
class of all Learning Company stockholders, an injunction against the merger,
rescission if the merger is consummated, damages, costs and disbursements,
including attorneys' fees. The consolidated complaint alleges that Learning
Company's board of directors breached their fiduciary duties to Learning
Company's stockholders by, among other things, failing to conduct due
diligence sufficient to have discovered material, adverse information
concerning Mattel's anticipated operational and financial results and agreeing
to an exchange ratio that failed to protect Learning Company stockholders
against a decline in the value of Mattel common stock. The consolidated
complaint names Mattel as an additional defendant, claiming that Mattel aided
and abetted the alleged breaches of fiduciary duty. Mattel will aggressively
defend itself against the action and will continue to pursue the merger.
General
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and
labor, which the Company is addressing or defending in the ordinary course of
business. Management believes that any liability which may potentially result
upon resolution of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
For information regarding the markets in which the Company's common stock,
par value $1.00 per share, is traded, see the cover page hereof, and for
information regarding the high and low closing prices of the common stock for
the last two calendar years, see Note 9 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
As of March 19, 1999, the Company had approximately 48,000 holders of record
of its common stock.
The Company paid dividends on its common stock of $0.06 per share in January
1997, $0.07 per share in April, July and October 1997 and January 1998 and
$0.08 per share in April, July and October 1998. The payment of dividends on
common stock is at the discretion of the Company's board of directors and is
subject to customary limitations.
Item 6. Selected Financial Data
The information under the caption "Five-Year Financial Summary" on page 25
in the Annual Report to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 26 through 32 in the
Annual Report to Stockholders is incorporated herein by reference.
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Foreign Currency Risk" on pages
30 and 31 in the Annual Report to Stockholders and Note 6 to the Consolidated
Financial Statements in the Annual Report to Stockholders are incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Mattel, Inc. and its subsidiaries,
together with the report of PricewaterhouseCoopers LLP dated February 1, 1999,
included on pages 33 through 52 in the Annual Report to Stockholders are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required under this Item relating to members of the Company's
board of directors is incorporated by reference herein from its 1999 Notice of
Annual Meeting of Stockholders and Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998.
The information with respect to the executive officers of the Company appears
under the heading "Executive Officers of the Registrant" in Part I herein.
Item 11. Executive Compensation
The information required under this Item is incorporated by reference herein
from the Company's 1999 Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after December 31, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this Item is incorporated by reference herein
from the Company's 1999 Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after December 31, 1998.
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated by reference herein
from the Company's 1999 Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after December 31, 1998.
20
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Annual Report
Page Number(1)
--------------
<S> <C>
(1) Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.. 33
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................. 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................. 35
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996....................... 36
Notes to Consolidated Financial Statements.................... 37-51
Report of PricewaterhouseCoopers LLP, Independent Accountants
to the Company............................................... 52
</TABLE>
- --------
(1) Incorporated by reference from the indicated pages of the Annual Report to
Stockholders for the year ended December 31, 1998. With the exception of
the information incorporated by reference in Items 1, 5, 6, 7, 8 and 14 of
this report, the Annual Report to Stockholders is not deemed filed as part
of this report.
21
<PAGE>
Independent Auditors' Report
----------------------------
To the Board of Directors and Stockholders
Tyco Toys, Inc.
Mount Laurel, New Jersey
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Tyco Toys, Inc. and subsidiaries for the year ended
December 31, 1996, not separately presented herein. Those financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on those financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Tyco Toys, Inc.
and subsidiaries for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 4, 1997 except for note 15,
as to which the date is March 27, 1997
22
<PAGE>
(2) Financial Statement Schedule for the years ended December 31, 1998, 1997
and 1996(1)
Report of Independent Accountants on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Allowances
(3) Exhibits (Listed by numbers corresponding to Item 601 of Regulation S-K)
<TABLE>
<C> <S>
2.0 Agreement and Plan of Merger, dated as of December 13, 1998, between
the Company and The Learning Company, Inc. (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
December 15, 1998)
2.1 Stock Option Agreement, dated as of December 13, 1998, between the
Company and The Learning Company, Inc. (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K, dated
December 15, 1998)
3.0 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.0 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993)
3.1 Certificate of Amendment of Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit B to the Company's
Proxy Statement dated March 23, 1996)
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit B to the Company's
Proxy Statement dated March 30, 1998)
3.3 By-laws of the Company, as amended to date (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-3
dated September 26, 1997)
4.0 Rights Agreement, dated as of February 7, 1992, between the Company
and The First National Bank of Boston, as Rights Agent (incorporated
by reference to Exhibit 1 to the Company's Registration Statement on
Form 8-A, dated February 12, 1992)
4.1 Specimen Stock Certificate with respect to the Company's Common Stock
(incorporated by reference to the Company's Report on Form 8-A, dated
February 28, 1996)
4.2 Certificate of Designation of Series C Preferred Stock dated March 26,
1997 (incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-3 dated August 21, 1997)
4.3 Deposit Agreement dated June 24, 1996 among Tyco Toys, Inc., Midlantic
Bank, N.A., as Depositary, and all holders from time to time of
depositary receipts issued thereunder (incorporated by reference to
Exhibit 4.2 to Tyco Toys, Inc.'s Registration Statement on Form S-3
dated June 20, 1996)
4.4 Amendment to Deposit Agreement dated as of March 27, 1997 between the
Company, as
successor to Tyco and The First National Bank of Boston (incorporated
by reference to Exhibit 4.9 to the Company's Registration Statement
on Form S-3 dated September 26, 1997)
4.5 Indenture dated as of February 15, 1996 between the Company and
Chemical Trust Company of California, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated April 11, 1996)
4.6* Warrant to Purchase Shares of Common Stock of Mattel, Inc., dated as
of June 27, 1996
4.7* Stock Subscription Warrant dated as of June 28, 1991 between Fisher-
Price, Inc. and certain investors (incorporated by reference to
Exhibit 4(c) to Fisher-Price's Report on Form 10-K for the transition
period from July 1, 1991 to December 29, 1991)
(The Company has not filed certain long-term debt instruments under
which the principal amount of securities authorized to be issued does
not exceed 10% of its total assets. Copies of such agreements will be
provided to the Securities and Exchange Commission upon request.)
</TABLE>
(1) All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
23
<PAGE>
<TABLE>
<C> <S>
10.0 Second Amended and Restated Credit Agreement dated as of March 11,
1998 among the Company, the Banks named therein and Bank of America
National Trust and Savings Association, as Agent (incorporated by
reference to Exhibit 99.0 to the Company's Current Report on Form
8-K dated August 21, 1998)
10.1 Receivables Purchase Agreement dated as of March 11, 1998 among the
Company, Mattel Factoring, Inc., the Banks named therein and
NationsBank of Texas, N.A., as Agent (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K dated
August 21, 1998)
10.2 Distribution Agreement dated November 12, 1997 among the Company,
Morgan Stanley & Co. Incorporated and Credit Suisse First Boston
Corporation (incorporated by reference to Exhibit 1.0 to the
Company's Current Report on Form 8-K dated November 12, 1997)
Executive Compensation Plans and Arrangements of the Company
10.3 Form of Indemnity Agreement between Mattel and its directors and
certain of its executive officers (incorporated by reference to
Exhibit B to Notice of Annual Meeting of Stockholders of the
Company dated March 24, 1987)
10.4 Amended and Restated Employment Agreement dated January 1, 1997
between the Company and Jill E. Barad (incorporated by reference to
Exhibit 10.0 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)
10.5 Employment Agreement dated May 5, 1997 between the Company and Gary
S. Baughman (incorporated by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated August 21, 1998)
10.6 Amended and Restated Employment Agreement dated September 9, 1996
between the Company and Joseph C. Gandolfo (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
10.7 Amended and Restated Employment Agreement dated July 29, 1996
between the Company and Ned Mansour (incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.8* Amended and Restated Employment Agreement dated April 14, 1997
between the Company and Harry J. Pearce
10.9 Employment Agreement dated December 20, 1996 between the Company and
Bruce L. Stein (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996)
10.10 Mattel, Inc. Management Incentive Plan (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.11 Mattel, Inc. Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.12* Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors
10.13 Mattel, Inc. Amended & Restated Supplemental Executive Retirement
Plan as of May 1, 1996 (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996)
10.14* Mattel, Inc. Deferred Compensation Plan
10.15 The Fisher-Price, Inc. Pension Plan (1989 Restatement) (incorporated
by reference to Exhibit 10(l) to Fisher-Price's Registration
Statement on Form 10 dated June 28, 1991)
</TABLE>
24
<PAGE>
<TABLE>
<C> <S>
10.16 The Fisher-Price Section 415 Excess Benefit Plan (incorporated by
reference to Exhibit 10(n) to Fisher-Price's Registration Statement
on Form 10 dated June 28, 1991)
10.17 Mattel, Inc. Personal Investment Plan, April 1, 1997 Restatement
(incorporated by reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K dated August 21, 1998)
10.18* Mattel, Inc. PIP Excess Plan
10.19* Pleasant Company Retirement Savings Plan and Trust Agreement, dated
July 1, 1995
10.20 Amended and Restated Mattel, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
10.21 Amendment to Amended and Restated Mattel, Inc. 1996 Stock Option
Plan (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 dated March 26, 1999)
10.22 Form of Option Agreement for Outside Directors under the 1996 Stock
Option Plan (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10.23* Form of Option Agreement under the 1996 Stock Option Plan
10.24 Mattel, Inc. 1997 Premium Price Stock Option Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement dated March
30, 1998)
10.25 First Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.0 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
10.26* Second Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan
10.27 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997
Premium Price Stock Option Plan (25% Premium Grant), as amended
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
10.28 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997
Premium Price Stock Option Plan (33 1/3% Premium Grant), as amended
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
11.0* Computation of Income per Common and Common Equivalent Share
12.0* Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends
13.0* Pages 24 through 54 of the Mattel, Inc. Annual Report to
Stockholders for the year ended December 31, 1998
21.0* Subsidiaries of the Registrant
23.0* Consent of PricewaterhouseCoopers LLP
23.1* Consent of Deloitte & Touche LLP
24.0* Power of Attorney (on page 27 of Form 10-K)
27.0* Financial Data Schedule (EDGAR filing only)
</TABLE>
- --------
* Filed herewith.
25
<PAGE>
(b) Reports on Form 8-K
Mattel, Inc. filed the following Current Reports on Form 8-K during the
quarterly period ended December 31, 1998:
<TABLE>
<CAPTION>
Financial
Items Statements
Date of Report Reported Filed
-------------- -------- ----------
<S> <C> <C>
October 29, 1998....................................... 5 None
November 16, 1998...................................... 5 None
December 15, 1998...................................... 5, 7 None
</TABLE>
(c) Exhibits Required by Item 601 of Regulation S-K
See Item (3) above
(d) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Allowances
Copies of Form 10-K (which includes Exhibit 24.0), Exhibits 11.0, 12.0,
13.0, 21.0, 23.0 and 23.1 and the Annual Report to Stockholders are
available to stockholders of the Company without charge. Copies of other
Exhibits can be obtained by stockholders of the Company upon payment of
twelve cents per page for such Exhibits. Written requests should be sent to
Secretary, Mattel, Inc., 333 Continental Boulevard, El Segundo, California
90245-5012.
26
<PAGE>
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.
MATTEL, INC.
Registrant
/s/ Kevin M. Farr
By: _________________________________
Kevin M. Farr
Senior Vice President and
Corporate Controller
Date: As of March 31, 1999
POWER OF ATTORNEY
We, the undersigned directors and officers of Mattel, Inc. do hereby
severally constitute and appoint Jill E. Barad, Ned Mansour, Robert Normile,
Lee B. Essner, and John L. Vogelstein, and each of them, our true and lawful
attorneys and agents, to do any and all acts and things in our name and behalf
in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any of them, may deem necessary or advisable to
enable said Corporation to comply with the Securities Exchange Act of 1934, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Annual Report on Form 10-K,
including specifically, but without limitation, power and authority to sign
for us or any of us, in our names in the capacities indicated below, any and
all amendments hereto; and we do each hereby ratify and confirm all that said
attorneys and agents, or any one of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jill E. Barad Chairman of the Board, March 31, 1999
____________________________________ President and Chief
Jill E. Barad Executive Officer
/s/ Harry J. Pearce Chief Financial Officer March 31, 1999
____________________________________ (principal financial
Harry J. Pearce officer)
/s/ Kevin M. Farr Senior Vice President and March 31, 1999
____________________________________ Corporate Controller
Kevin M. Farr (principal accounting
officer)
/s/ Harold Brown Director March 31, 1999
____________________________________
Harold Brown
/s/ Tully M. Friedman Director March 31, 1999
____________________________________
Tully M. Friedman
/s/ Joseph C. Gandolfo Director and President, March 31, 1999
____________________________________ Worldwide Manufacturing
Joseph C. Gandolfo Operations
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ronald M. Loeb Director March 31, 1999
____________________________________
Ronald M. Loeb
/s/ Ned Mansour Director, President, March 31, 1999
____________________________________ Corporate Operations and
Ned Mansour General Counsel
/s/ Andrea L. Rich Director March 31, 1999
____________________________________
Andrea L. Rich
/s/ William D. Rollnick Director March 31, 1999
____________________________________
William D. Rollnick
/s/ Pleasant T. Rowland Vice Chairman of the Board March 31, 1999
____________________________________ and President, Pleasant
Pleasant T. Rowland Company
/s/ Christopher A. Sinclair Director March 31, 1999
____________________________________
Christopher A. Sinclair
Director
____________________________________
Bruce L. Stein
/s/ John L. Vogelstein Director March 31, 1999
____________________________________
John L. Vogelstein
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Mattel, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 1, 1999 appearing on page 52 of the December 31, 1998
Annual Report to Stockholders of Mattel, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 1, 1999
29
<PAGE>
SCHEDULE II
MATTEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
(In thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charged to Net at End
of Year Operations Deductions of Year
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended December 31, 1998...... $30,737 $34,780 $(24,313)(a) $41,204
Year Ended December 31, 1997...... 21,009 21,036 (11,308)(a) 30,737
Year Ended December 31, 1996...... 13,119 21,381 (13,491)(a) 21,009
Allowance for Inventory
Obsolescence
Year Ended December 31, 1998...... $33,774 $65,251 $(41,703)(b) $57,322
Year Ended December 31, 1997...... 35,645 52,312 (54,183)(b) 33,774
Year Ended December 31, 1996...... 30,620 73,004 (67,979)(b) 35,645
</TABLE>
- --------
(a) Includes write-offs, recoveries of previous write-offs, and currency
translation adjustments. Increase in net deductions over 1997 is due to
beginning balances from acquired companies ($1.4 million) and transfers to
legal reserve for insolvent customers ($11.6 million).
(b) Primarily represents relief of previously established reserves resulting
from the disposal of related inventory, raw materials, write-downs and
currency translation adjustments.
30
<PAGE>
EXHIBIT 4.6
THIS WARRANT IS NON-TRANSFERABLE OTHER THAN TO THE WALT DISNEY COMPANY OR ANY OF
ITS DIRECTLY OR INDIRECTLY WHOLLY-OWNED SUBSIDIARIES PRIOR TO THE COMMENCEMENT
DATE (AS DEFINED HEREIN). THIS WARRANT CONTAINS CERTAIN ADDITIONAL RESTRICTIONS
ON ITS TRANSFER AND EXERCISE ON AND SUBSEQUENT TO THE COMMENCEMENT DATE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SECURITIES
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION
THEREFROM. THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE RIGHTS OF THE
HOLDER HEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OTHER
RESTRICTIONS, AND THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
(INCLUDING ANY FUTURE HOLDER) IS BOUND BY THE TERMS OF A WARRANT PURCHASE
AGREEMENT BETWEEN THE ORIGINAL PURCHASER AND THE COMPANY (COPIES OF WHICH MAY
BE OBTAINED FROM THE COMPANY).
WARRANT TO PURCHASE 3,000,000 SHARES OF COMPANY STOCK OF
MATTEL, INC.
This certifies that the holder hereof (the "Holder"), for value received is
------
entitled to purchase from Mattel, Inc., a Delaware corporation (the "Company"),
-------
three million (3,000,000) fully paid and nonassessable shares (the "Warrant
-------
Shares") of the Company's Common Stock, par value $1.00 per share (the "Common
- ------ ------
Stock"), at a price of $27.375 per share (the "Stock Purchase Price") (such
- ----- --------------------
price determined as the closing price for the Company's Common Stock on the New
York Stock Exchange on Apri 1, 1996, the date specified by the Company and
Purchaser upon their execution of that certain letter of intent with respect to
- ---------
the transactions contemplated by the Warrant Purchase Agreement between the
Company and Purchaser dated June 27, 1996 (the "Warrant Purchase Agreement") and
--------------------------
the License Agreement referred to therein), at any time on or after the
-----------------
Commencement Date (as defined below) up to and including 5:00 p.m. (Pacific
time) on the Expiration Date (as defined below), upon surrender to the Company
at its principal offices at 333 Continental Boulevard, El Segundo, California
90245 (or at such other location as the Company may advise the Holder in
writing) of this Warrant properly endorsed with the Form of Subscription
attached hereto duly completed and signed and either (a) upon payment by wire
transfer of immediately available funds of the aggregate Stock Purchase Price
for the Warrant Shares or (b) at the election of the Holder (such election
referred to herein as "Cashless Exercise" of this Warrant), as provided for in
-------- --------
Section 1(B) below. The exercise of this Warrant is hereby expressly conditioned
upon the accuracy of all representations and warranties contained in such Form
of Subscription. The Stock Purchase Price and the number of shares purchasable
hereunder are subject to adjustment as provided in Section 3 of this Warrant.
"Commencement Date" shall mean April 2, 1999, whether or not a business day.
-----------------
"Expiration Date" shall mean April 2, 2004 (or, in the event that April 2, 2004
---------------
is not a business day, the next succeeding business day); provided, however,
that if the Company's use of the rights granted under the License Agreement is
not extended for three years from its initial term, in accordance with the
provisions of Subparagraph 1(R) of the License Agreement, then the "Expiration
Date" for this Warrant shall mean April 2, 2001 (or, in the event that April 2,
2001 is not a business day, the next succeeding business day); and provided,
further, that if the Company's use of the rights granted under the License
Agreement is extended for five years from its initial term, in accordance with
the provisions of Subparagraph
1
<PAGE>
2(K) of the License Agreement, then the "Expiration Date" for this Warrant shall
mean April 2, 2006 (or, in the event that April 2, 2006 is not a business day,
the next succeeding business day); and provided, further, the "Expiration Date",
as so established, with respect to the exercise of this Warrant for Registrable
Securities, may be extended for up to the specified number of additional days
pursuant to the provisions of Section 5(E)(iii) of the Warrant Purchase
Agreement. Notwithstanding the above, this Warrant shall terminate immediately
in the event that the License Agreement has been terminated by the Company as a
result of a material breach by Purchaser. Termination by Purchaser as a result
of a material breach by the Company shall not result in termination of the
Warrant.
At any time prior to the Expiration Date, at the election of the Holder
hereof, this Warrant, which represents the Holder's right to purchase three
million (3,000,000) fully-paid and non-assessable shares of the Company's Common
Stock at the Stock Purchase Price (the "Original Warrant"), may be divided into
two equal Warrants (each, a "One-half Warrant"), each One-half Warrant
----------------
representing the right to purchase one and one-half million (1,500,000) fully-
paid and non-assessable shares of the Company's Common Stock at the Stock
Purchase Price. Except for such number of shares issuable upon exercise thereof,
each One-half Warrant shall have the same terms and provisions, and be subject
to the same conditions, notice provisions and restrictions on exercise and
transfer, and be identical in all other respects, to the Original Warrant. From
and after the time the Original Warrant becomes divided into two One-half
Warrants, all references herein and in the Warrant Purchase Agreement (as
defined below) to (x) the "Holder" of this Warrant shall be deemed to refer to
the rightful holder of each One-half Warrant and (y) this "Warrant" shall be
deemed to refer to each One-half Warrant.
This Warrant (or One-half Warrant, as the case may be) may only be
exercised as a whole and may not be exercised in part or from time to time.
This Warrant is issued pursuant to, and subject of the provisions of, the
Warrant Purchase Agreement and, by its acceptance of this Warrant, the Holder
expressly agrees to comply with the provisions of the Warrant Purchase Agreement
applicable to this Warrant (including, without limitation, the provisions
contained in Section 5(C) relating to subsequent transfers of this Warrant and
in Section 5 (E) relating to the exercise procedure applicable to this Warrant).
Terms used but not defined in this Warrant shall have the respective meanings
assigned to them in the Warrant Purchase Agreement, to which reference is
hereby made.
This Warrant is subject to the following further terms and conditions:
1. Exercise.
(A) Exercise Procedure; Issuance of Certificates; Payment for Shares.
This Warrant is exercisable at the option of the Holder at any time on or after
the Commencement Date and prior to or on the Expiration Date for the Warrant
Shares which may be purchased hereunder. The Company agrees that the Warrant
Shares purchased under this Warrant shall be and are deemed to be issued to the
Holder as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been surrendered and payment made for such
shares. Subject to the provisions of Section 2 hereof, certificates for the
Warrant Shares to be purchased, together with any other securities or property
to which the Holder is entitled upon such exercise, shall be delivered to the
Holder by the Company's transfer agent at the Company's expense within a
reasonable time after the rights represented by this Warrant have been
exercised. Each stock certificate so delivered shall be in such denominations of
Warrant Shares as may be requested by the Holder and shall be registered in the
name of the Holder.
2
<PAGE>
The Holder further agrees to comply with the provisions of Section
5(E) of the Warrant Purchase Agreement respecting any proposed exercise of this
Warrant.
(B) Cashless Exercise of this Warrant. The Holder may, at its
election, exercise its right to receive shares of Common Stock on a net basis
such that, without the exchange of any funds and upon surrender of this
Warrant, the Holder receives shares of Common Stock equal to the value (as
determined below) of this Warrant by surrender of this Warrant to the Company at
its principal offices (at the above address) together with notice of such
election, in which event the Company shall issue to the Holder a number of
shares of Common Stock computed using the following formula:
X = Y x (A-B)
---------
A
where:
X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock subject to this
Warrant
A = the market price of a share of Common Stock for the date
of exercise (the market price determined, for any date, as the average of the
closing prices of the Common Stock on the New York Stock Exchange (or such other
principal securities exchange or automated quotation system upon which the
Common Stock may then be listed for public trading) for the five immediately
preceding trading days on such exchange)
B = the then current Stock Purchase Price
2. Shares to be Fully Paid; Reservation of Shares. The Company covenants
and agrees that all Warrant Shares which may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable and
free from all preemptive or any similar rights of any stockholder of the Company
and free of any liens or encumbrances arising through the Company. The Company
further covenants and agrees that during the period within which this Warrant
may be exercised the Company will at all times have authorized and reserved, for
the purpose of issue or transfer upon exercise of this Warrant, a sufficient
number of authorized but unissued shares of Common Stock, when and as required
to provide for the exercise of the rights represented by this Warrant. The
Company will take all such action as may be necessary to assure that such shares
of Common Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange or automated quotation system upon which the Common Stock may be
listed.
3. Adjustment of Stock Purchase Price; Number of Shares. The Stock Purchase
Price and the number of Warrant Shares purchasable upon the exercise of this
Warrant shall be subject to adjustment from time to time upon the occurrence of
certain events described in this Section 3; provided, however, that if a certain
event shall cause the Stock Purchase Price to be adjusted to a price less than
the par value of the Common Stock, the Company prior to such event shall
decrease the par value of the Common Stock so that the Stock Purchase Price
shall not be less than the par value of the Common Stock following the
occurrence of such event.
(A) Adjustment of Purchase Price. In the event that the Company at any
time or from time to time after the issuance of this Warrant shall declare or
pay, without consideration, any dividend on the Common Stock payable in Common
Stock or in any right to acquire Common Stock for no consideration, or shall
effect a subdivision of the outstanding shares of
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Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the Stock
Purchase Price in effect immediately prior to such event shall, concurrently
with the effectiveness of such event, be proportionately decreased or
increased, as appropriate. In the event that the Company shall declare or pay,
without consideration, any dividend on the Common Stock payable in any right to
acquire Common Stock for no consideration, then the Company shall be deemed to
have made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock. Upon each adjustment of the Stock Purchase Price pursuant to this Section
3(A), the Holder of this Warrant shall thereafter be entitled to purchase, at
the Stock Purchase Price resulting from such adjustment, the number of shares of
Common Stock obtained by multiplying the Stock Purchase Price in effect
immediately prior to such adjustment by the number of shares of COmmon Stock
purchasable pursuant hereto immediately prior to such adjustment, and dividing
the product thereof by the Stock Purchase Price resulting from such adjustment.
(B) Adjustment for Reorganization, Reclassification, Consolidation,
Merger or Sale. If any capital reorganization or reclassification of the
capital stock of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected (other than as provided for in Section
3(A)) in such a way that holders of Common Stock shall be entitled to receive
cash, stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be made
whereby the Holder shall thereafter have the right to purchase and receive upon
the basis and upon the terms and conditions specified in this Warrant upon
exercise of this Warrant and in lieu of the shares of the Common Stock of the
Company immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, such cash, shares of stock, securities or assets
as may be issued or payable with respect to or in exchange for a number of
outstanding shares of Common Stock equal to the number of shares of such Common
Stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby, and in any such case appropriate provision shall
be made with respect to the rights and interest of the Holder that the
provisions thereof shall hereafter be applicable, as nearly as may be, in
relation to any shares of cash, stock, securities or assets thereafter
deliverable upon the exercise hereof.
(C) Notice of Adjustment. Upon any adjustment of the Stock Purchase
Price or any increase or decrease in the number of shares of Common Stock
purchasable upon the exercise this Warrant, the Company shall within ten
business days give written notice thereof, by first class mail, postage prepaid,
addressed to the Holder at the address of the Holder as shown on the books of
the Company. The notice shall be signed by the Company's chief financial officer
and shall state the Stock Purchase Price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable at such price
upon the exercise of this Warrant, setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is based.
4. Issue Tax. The issuance of certificates in the name of the Holder
for the Warrant Shares upon the exercise of this Warrant shall be made without
charge to the Holder of this Warrant for any issue tax in respect thereof.
Notwithstanding the foregoing, the Holder shall be responsible for payment of
all stock transfer taxes, if any, in respect of any transfer of this Warrant or
any Warrant Shares.
5. No Voting or Dividend Rights; Limitation of Liability. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder in
respect of meetings of stockholders for the election of directors
4
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of the Company or any other matters or any rights whatsoever as a stockholder of
the Company. Except for the adjustment to the Stock Purchase Price pursuant to
Section 3(A) hereof in the event of a dividend on the Common Stock payable in
shares of Common Stock, no dividends or interest shall be payable or accrued in
respect of this Warrant or the interest represented hereby or the shares
purchasable hereunder until, and only to the extent that, this Warrant shall
have been exercised.
6. Restrictions on Transferability of Securities; Compliance With
Securities Act.
(A) Restrictions on Transferability of the Warrant Shares. The
Warrant Shares shall not be transferable except upon the conditions specified in
the Warrant Purchase Agreement.
(B) Restrictions on Transferability of this Warrant; Company Right of
First Refusal; Transfers Not Permitted to Significant Competitors of the
Company.
(i) This Warrant shall not be transferable prior to the Commencement
Date. On and after the Commencement Date, this Warrant shall not be
transferable, except (a) as a whole Warrant (or whole One-half Warrant) to a
single transferee (where not more than one person or entity has a beneficial
interest in this Warrant or One-half Warrant, as the case may be), and (b) only
to a person or entity that is not a Significant Competitor (as defined in the
----------------------
License Agreement), and (c) only upon the conditions specified in the Warrant
Purchase Agreement, which conditions are intended to ensure compliance with the
provisions of the Securities Act and applicable "blue sky" laws and (d) only in
accordance with the other provisions of this Section 6.
(ii) By acceptance of this Warrant, the Holder agrees to provide to
the Company five (5) business days' prior written notice of the Holder's
intention, directly or indirectly, to sell, offer or contract to sell, pledge or
otherwise dispose or transfer (collectively, "transfer") this Warrant, which
--------
notice shall include (a) the identity, in reasonable and specific detail, of the
proposed direct or indirect transferee (including, if the proposed transferee is
a broker or dealer, the identity, in reasonable and specific detail, of any
subsequent transferee to whom such broker or dealer intends or expects to
transfer this Warrant following its receipt hereof), (b) a copy of a binding
agreement (subject only to the Company's right of first refusal discussed
below), executed by the Holder, as the proposed transferor, and the proposed
transferee, (c) in the event the amount of the agreed upon consideration for the
proposed sale of this Warrant is all cash (such amount, the "Warrant Transfer
Cash Price"), the Warrant Transfer Cash Price and a certification that the
Warrant Transfer Cash Price was determined on the basis of bona fide arms'
length negotiations between the parties to such agreement, (d) in the event that
some or all of the agreed upon consideration for the proposed sale of this
Warrant is property (tangible or intangible) other than cash, a reasonably
specific description of such property intended as consideration for the transfer
and (e) all other material terms of the proposed transaction (such notice shall
be referred to herein as a "Holder's Notice of Proposed Transfer of Warrant").
-----------------------------------------------
(iii) Prior to the time and date of the proposed transfer set forth
in a Holder's Notice of Proposed Transfer of Warrant, the Company may elect to
exercise a right of first refusal to purchase the Warrant at the Right of First
Refusal Price by providing the Holder with written notice of such election. If
the Company so notifies the Holder of its election to exercise such right of
first refusal, then the Company shall tender to the Holder as payment for this
Warrant a wire transfer of immediately available funds in the amount of the
Right of First Refusal Price, and the closing with respect to the purchase of
this Warrant a shall occur (a) in the event the proposed consideration is all
cash, no later than ten (10) business days after the Company receives the
Holder's Notice of Proposed Transfer of Warrant and (b) in the event the
proposed consideration is other than all cash, within the later of (w) ten (10)
business days after the Company receives the Holder's Notice of Proposed
Transfer of Warrant and (x) three (3) business days following the
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Company's receipt from the investment banking firm referred to below of a letter
setting forth the price determined by such firm to be fair (including a
reasonable description of the basis for such determination) and evidence of the
Holder's payment of fees and disbursements of such investment banking firm as
provided below. If the Company does not so notify the Holder of its election to
exercise such right of first refusal, then the Holder may transfer the Warrant
on the terms and to the persons set forth in the Notice of Proposed Transfer of
Warrant within 45 days of the date of such Notice, subject to the limitations
set forth elsewhere in this Warrant and in the Warrant Purchase Agreement. In
the event that such transfer is not made within such 45-day period, any
subsequent transfer shall be subject to the right of first refusal contained in
this Section 5(B). The "Right of First Refusal Price" shall be calculated as (y)
----------------------------
in the event the proposed consideration is all cash, the Warrant Transfer Cash
Price or (z) in the event the proposed consideration is other than all cash, a
price determined to be fair by a nationally-recognized investment banking firm
chosen by the Company to value the aggregate consideration which is the subject
of such proposed transfer (provided, however, that the Holder shall be obligated
to pay all fees and disbursements of such investment banking firm incurred in
connection with such valuation and any matters related thereto).
(C) Restrictive Legend. Each certificate representing this Warrant or
the Warrant Shares (collectively, the "Securities") or any other securities
----------
issued in respect of Securities upon any such stock split, stock dividend,
reclassification or reorganization shall (unless otherwise permitted by the
provisions of the Warrant Purchase Agreement) be stamped or otherwise imprinted
with a legend substantially in the following form (in addition to any legend
required under applicable federal or state securities laws or the Company's
Certificate of Incorporation):
In the case of this Warrant:
---------------------------
THIS WARRANT IS NON-TRANSFERABLE OTHER THAN TO THE WALT DISNEY COMPANY OR
ANY OF ITS DIRECTLY OR INDIRECTLY WHOLLY-OWNED SUBSIDIARIES PRIOR TO THE
COMMENCEMENT DATE (AS DEFINED HEREIN). THIS WARRANT CONTAINS CERTAIN
ADDITIONAL RESTRICTIONS ON ITS TRANSFER AND EXERCISE ON AND SUBSEQUENT TO
THE COMMENCEMENT DATE.
In the case of the Warrant Shares:
---------------------------------
THE SECURITIES ARE NON-TRANSFERABLE PRIOR TO THE COMMENCEMENT DATE (AS
DEFINED HEREIN).
In the case of this Warrant and Warrant Shares:
----------------------------------------------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN
EXEMPTION THEREFROM. THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE
RIGHTS OF THE HOLDER HEREOF ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
OTHER RESTRICTIONS, AND THE HOLDER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE (INCLUDING ANY FUTURE HOLDER) IS BOUND BY THE TERMS OF A WARRANT
PURCHASE AGREEMENT BETWEEN THE ORIGINAL PURCHASER AND THE COMPANY (COPIES OF
WHICH MAY BE OBTAINED FROM THE COMPANY).
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7. Modification and Waiver. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
8. Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
the Holder at its address as shown on the books of the Company or to the Company
at the address indicated therefor in the first paragraph of this Warrant.
9. Descriptive Headings and Governing Law. The descriptive headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of Delaware without regard
to conflict of laws.
10. Lost Warrants or Stock Certificates. The Company represents and
warrants to the Holder that upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction, or mutilation of any Warrant or
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity and, if requested, bond reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and cancellation
of such Warrant or stock certificate, the Company at its expense will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
11. Fractional Shares. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the Holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the market price of the Common Stock (the market price
determined, for any date, as the average of the closing prices of the Common
Stock on the New York Stock Exchange (or such other principal securities
exchange or automated quotation system upon which the Common Stock may then be
listed for public trading) for the five immediately preceding trading days on
such exchange).
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officers, thereunto duly authorized this 27th day of June 1996.
Mattel, Inc.
/s/ Ned Mansour
-----------------------------
By: Ned Mansour
Title: President, Mattel USA
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") between Mattel, Inc., a
Delaware corporation ("Mattel"), and HARRY J. PEARCE (the "Executive"), dated as
of the 14th day of April, 1997.
1. Employment Period. Mattel hereby agrees to employ and continue in
-----------------
its employ the Executive, and the Executive hereby accepts such employment and
agrees to remain in the employ of Mattel, for the period commencing on the date
of this Agreement and ending on the third anniversary of such date (the
"Employment Period"); provided that commencing on the first day of the month
next following the effective date hereof, and on the first day of each month
thereafter (the most recent of such dates is hereinafter referred to as the
"Renewal Date"), the Employment Period shall be automatically extended so as to
terminate three years from such Renewal Date, unless at least 60 days prior to
any Renewal Date Mattel or the Executive shall give notice to the other that the
Employment Period shall not be so extended.
2. Duties.
------
(a) Executive's Position and Duties. During the Employment Period,
-------------------------------
the Executive's position (including titles), authority and responsibilities
shall be similar to, but no less than those held by the Executive on the date
hereof with such additions and modifications consistent with responsibilities
<PAGE>
generally assigned to executive officers of Mattel as the Chief Executive
Officer of Mattel ("CEO") may in her discretion and acting in good faith from
time to time assign to the Executive. Executive is herewith appointed Chief
Financial Officer of Mattel, Inc., reporting to the CEO, with overall
responsibility, authority and accountability for financial matters relating to
the business of the corporation and any of its subsidiaries. It is further
provided that Executive shall be the next insider appointed to serve as a member
of the Board of Directors of Mattel, Inc., immediately following Gary Baughman's
appointment, or unrealized appointment as the case may be.
(b) Full Time. The Executive agrees to devote his full business time
---------
to the business and affairs of Mattel and to use his best efforts to perform
faithfully and efficiently the responsibilities assigned to him hereunder to the
extent necessary to discharge such responsibilities, except for (i) services on
corporate, civic or charitable boards or committees not significantly
interfering with the performance of such responsibilities; (ii) periods of
vacation and sick leave to which he is entitled; and (iii) the management of
personal investments and affairs. The Executive will not engage in any outside
business activity (as distinguished from personal investment activity and
affairs) including, but not limited to, activity as a consultant, agent, partner
or officer, or provide
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business services of any nature directly or indirectly to a corporation or other
business enterprise.
3. Compensation.
------------
(a) Base Salary. During the Employment Period, the Executive shall
-----------
receive a base salary ("Base Salary") at a bi-weekly rate at least equal to the
bi-weekly salary paid to the Executive by Mattel on the date of this Agreement
($21,154). The Base Salary shall be reviewed at least every 18 months and may
be increased at any time and from time to time by action of the Board of
Directors of Mattel or the Compensation/Options Committee thereof or any
individual having authority to take such action in accordance with Mattel's
regular practices. Any increase in the Base Salary shall not serve to limit or
reduce any other obligation of Mattel hereunder and, after any such increase,
the Base Salary shall not be reduced.
(b) Bonus Programs. In addition to the Base Salary, the Executive
--------------
shall participate throughout the Employment Period in Mattel's cash or deferred
bonus incentive plans and programs ("Bonus Programs") as may be in effect from
time to time with respect to executives employed by Mattel at a participation
level reflecting the Executive's responsibilities, including, but not limited
to, the Management Incentive Plan ("MIP") and the Long-Term Incentive Plan
("LTIP") as they may be modified from time to
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<PAGE>
time and any plans or programs substituted therefor; provided that, except as
provided in Section 5(f) hereof, the determination of the amounts to be paid
pursuant to such plans or programs shall be made by the Board of Directors of
Mattel or a committee thereof authorized to take such action and shall be made
in accordance with Mattel's compensation practice and the terms and provisions
of such plans or programs; provided further that the Executive's eligibility for
and participation in each of the Bonus Programs shall be at a level and on terms
and conditions no less favorable than those available to any other comparably
situated executive or consultant. Notwithstanding the foregoing, it is expressly
and specifically provided that Executive's participation in the Mattel 1996-1998
Long-Term Incentive Plan shall be at a target award level of $1,500,000 and on a
full term, non-prorated basis as if Executive had been employed upon inception
of this particular Plan, with the only exception and omission being the interim
payment applicable to 1996 performance under the Plan, the latter having been
previously disbursed to participants prior to execution of this Agreement. It is
further provided that for the 1997 Plan year, Executive shall receive a
guaranteed minimum Management Incentive Plan ("MIP") award of not less than
$200,000, payable the earlier of: (i) on the date that such awards are
distributed to other eligible participants at a comparable level as Executive,
or (ii) on April 10, 1998, whichever occurs first.
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(c) Incentive and Savings Plans. In addition to the Base Salary and
---------------------------
participation in the Bonus Programs, during the Employment Period the Executive
shall be entitled to participate in all incentive and savings plans and
programs, including, but not limited, to stock option plans and retirement
plans, as may be in effect from time to time with respect to executives employed
by Mattel at the Executive's level so as to reflect the Executive's
responsibilities. Notwithstanding the foregoing, it is expressly and
specifically provided that the Company, upon commencement of Executive's
employment, shall grant to Executive an initial grant of 200,000 stock options
under the terms of the 1996 Mattel Stock Option Plan. Over the initial 3-year
period of Executive's employment, it is agreed that Executive shall receive
stock option grants of not less than an aggregate of 500,000 stock options
issued under the terms of the 1996 Mattel Stock Option Plan or any successor
plan. In ensuing years, Executive shall receive annual grants of stock options
under one or more of Mattel's Stock Option Plans as in effect from time to time
in accordance with Mattel's policies and practices for other executives. It is
further provided that Executive shall be accorded full Mattel credit for all
prior service accrued while in the employ of Tyco Toys, Inc., and such credit
shall be applicable in the computation of all of Mattel's benefits-related plans
and programs, specifically including the Mattel 1994 Supplemental Executive
Retirement Plan ("SERP"), which provide
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<PAGE>
thereupon for a service-related component in the computation of Executive's
eligibility for benefits and/or the receipt thereof.
(d) Benefit Plans. The Executive and/or his family, as the case may
-------------
be, shall be entitled to receive all amounts which he or his family is or would
have been entitled to receive as benefits under all medical, dental, disability,
group life, accidental death and travel accident insurance plans and programs of
Mattel in which the Executive is a participant as in effect from time to time
with respect to executives employed by Mattel.
(e) Expenses. During the Employment Period, the Executive shall be
--------
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the policies and practices of Mattel as in
effect from time to time with respect to executives employed by Mattel.
(f) Fringe Benefits. The Executive shall be entitled to fringe
---------------
benefits, commensurate with those available to comparable level executives,
including an automobile and related expenses as well as the use of a company-
issued gasoline credit card, club memberships and related expenses, and
financial counseling, including tax preparation and a one-time estate planning
service, in accordance with the policies of Mattel as in
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effect from time to time with respect to executives employed by Mattel.
(g) Vacation. During the Employment Period, the Executive shall be
--------
entitled to paid vacation in accordance with the policies of Mattel as in effect
from time to time with respect to executives employed by Mattel.
(h) Certain Amendments. Nothing herein shall be construed to prevent
------------------
Mattel from amending, altering, eliminating or reducing any plans, benefits or
programs so long as the Executive continues to have the opportunity to receive
compensation and benefits consistent with Sections 3(a) through (g).
4. Termination.
-----------
(a) Death or Disability. This Agreement shall terminate automatically
-------------------
upon the Executive's death; provided that Base Salary, all bonuses and earned
benefits will be continued and paid for a period of six (6) months thereafter,
unless a longer period is otherwise specified. Mattel may terminate this
Agreement, after having established the Executive's Disability, by giving to the
Executive written notice of its intention to terminate his employment, and his
employment with Mattel shall terminate effective on the 90th day after receipt
of such notice
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<PAGE>
(the "Disability Effective Date"). For purposes of this Agreement, the
Executive's Disability shall occur and shall be deemed to have occurred only
when the Executive becomes entitled to receive disability benefits under the
Mattel Long-Term Disability Plan for exempt employees.
(b) Cause. Mattel may terminate the Executive's employment for
-----
"Cause" if a majority, consisting of at least 2/3 of the non-management members
of the Board of Directors of Mattel, determines that "Cause" exists. For
purposes of this Agreement, "Cause" means (i) an act or acts of dishonesty on
the Executive's part which are intended to result in his substantial personal
enrichment at the expense of Mattel; (ii) repeated violations by the Executive
of his obligations under Section 2 of this Agreement which are demonstrably
willful and deliberate on the Executive's part and which resulted in material
injury to Mattel; (iii) conduct of a criminal nature which has or which is more
likely than not to have a material adverse effect on Mattel's reputation or
standing in the community or on its continuing relationships with its customers
or those who purchase or use its products; or (iv) fraudulent conduct in
connection with the business or affairs of Mattel, regardless of whether said
conduct is designed to defraud Mattel or others; provided that, in each case,
the Executive has received written notice of the described activity, has been
afforded a reasonable
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<PAGE>
opportunity to cure or correct the activity described in the notice, and has
failed to substantially cure, correct or cease the activity, as appropriate.
(c) Good Reason. The Executive may terminate his employment at any
-----------
time for Good Reason. For purposes of this Agreement, "Good Reason" means the
good faith determination by the Executive that any one or more of the following
have occurred:
(i) without the express written consent of the Executive, any
change(s) in any of the duties, authority, or responsibilities of the Executive
which is (are) inconsistent in any substantial respect with the Executive's
position, authority, duties, or responsibilities as contemplated by Section 2 of
this Agreement;
(ii) any failure by Mattel to comply with any of the provisions
of Section 3 of this Agreement, other than an insubstantial and inadvertent
failure remedied by Mattel promptly after receipt of notice thereof given by the
Executive;
(iii) without the Executive's consent, any requirement by Mattel
that Executive be based at any office or location other than an office or
location in Los Angeles, California except for travel reasonably required in the
performance of the Executive's responsibilities;
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(iv) any proposed termination by Mattel of the Executive's
employment otherwise than as permitted by this Agreement; or
(v) any failure by Mattel to obtain the assumption and agreement
to perform this Agreement by a successor as contemplated by Section 11(b).
(d) Change of Control. A "Change of Control" shall be deemed to have
-----------------
occurred if:
(i) any "Person," which shall mean a "person" as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (other than Mattel, any trustee or other fiduciary
holding securities under an employee benefit plan of Mattel) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of Mattel representing 20% or more of the combined
voting power of Mattel's then outstanding voting securities;
(ii) during any period of 24 consecutive months, individuals,
who at the beginning of such period constitute the Board of Directors of Mattel,
and any new director whose election by the Board of Directors, or whose
nomination for election by Mattel's stockholders, was approved by a vote of at
least one-half (1/2) of the directors then in office (other than in
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connection with a contested election), cease for any reason to constitute at
least a majority of the Board of Directors;
(iii) the stockholders of Mattel approve (I) a plan of complete
liquidation of Mattel or (II) the sale or other disposition by Mattel of all or
substantially all of Mattel's assets unless the acquirer of the assets or its
board of directors shall meet the conditions for a merger or consolidation in
subparagraphs (iv)(I) or (iv)(II) below; or
(iv) the consummation of a merger or consolidation of Mattel
with any other entity other than:
(I) a merger or consolidation which results in the voting
securities of Mattel outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the surviving entity's outstanding voting securities immediately after such
merger or consolidation; or
(II) a merger or consolidation which would result in the
directors of Mattel (who were directors immediately prior thereto) continuing to
constitute at least 50% of all directors of the surviving entity immediately
after such merger or consolidation.
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<PAGE>
In this paragraph (iv), "surviving entity" shall mean only an entity in
which all of Mattel's stockholders immediately before such merger or
consolidation (determined without taking into account any stockholders properly
exercising appraisal or similar rights) become stockholders by the terms of such
merger or consolidation, and the phrase "directors of Mattel (who were directors
immediately prior thereto)" shall include only individuals who were directors of
Mattel at the beginning of the 24 consecutive month period preceding the date of
such merger or consolidation.
(e) Notice of Termination. Any termination of the Executive's
---------------------
employment by Mattel for Cause following a Change of Control or by the Executive
for Good Reason shall be communicated by Notice of Termination to the other
party hereto given in accordance with Section 13(b). Any termination by Mattel
due to Disability shall be given in accordance with Section 4(a). For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon; (ii)
except in the event of a termination following a Change of Control, sets forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated; and
(iii) specifies the Date of Termination (defined below).
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(f) Date of Termination. "Date of Termination" means the date of
-------------------
actual receipt of the Notice of Termination or any later date specified therein
(but not more than fifteen (15) days after the giving of the Notice of
Termination), as the case may be; provided that (i) if the Executive's
employment is terminated by Mattel for any reason other than Cause or
Disability, the Date of Termination is the date on which Mattel notifies the
Executive of such termination; (ii) if the Executive's employment is terminated
due to Disability, the Date of Termination is the Disability Effective Date; and
(iii) if the Executive's employment is terminated due to the Executive's death,
the Date of Termination shall be the date of death.
5. Obligations of Mattel upon Termination. Other than as specifically set
--------------------------------------
forth or referenced in this Agreement, the Executive shall not be entitled to
any benefits on or after the Date of Termination.
(a) Death. If the Executive's employment is terminated by reason of
-----
the Executive's death, this Agreement shall terminate without further
obligations by Mattel to the Executive's legal representatives under this
Agreement other than those obligations accrued hereunder or under the terms of
the applicable Mattel plan or program which takes effect at the date of his
death or as otherwise provided in Section 4(a) or this
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<PAGE>
Section 5(a). As of the Date of Termination, the Executive's family shall be
entitled to the Executive's benefits on the terms described in Section 5(d)(iv)
(other than outplacement services and leased car benefits, which are excluded),
except that healthcare insurance coverage and financial and legal counseling
services shall terminate on the third anniversary of the Date of Termination.
The Executive's country club membership must be converted or sold, as the case
may be, by the Executive's successor-in-interest within one year after the Date
of Termination on the terms described in Section 5(d)(iv)(III); provided that no
such conversion or sale shall be required and Mattel shall cause the membership
to be transferred to the Executive's spouse at no cost to the spouse if the
Executive has had the membership for at least three years.
(b) Disability. If the Executive's employment is terminated by reason
----------
of the Executive's Disability, the Executive shall be entitled to receive after
the Disability Effective Date (i) disability benefits, if any, at least equal to
those then provided by Mattel to disabled employees and/or their families and
(ii) other benefits on the terms described in Section 5(d)(iv).
(c) Cause. If the Executive's employment is terminated for Cause or
-----
if the Executive terminates his
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<PAGE>
employment without Good Reason, Mattel shall pay the Executive his full Base
Salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given, and Mattel shall have no further obligations to the
Executive under this Agreement, except that if Executive is duly vested under
the express terms of the SERP, he shall be entitled to receive SERP benefits in
accordance with the terms and conditions of the SERP.
(d) Good Reason; Other Than for Cause or Disability. If Mattel
-----------------------------------------------
terminates the Executive's employment other than for Cause or Disability, or the
Executive terminates his employment for Good Reason (in each case, other than
within 18 months following a Change of Control as provided in Section 5(e)):
(i) Mattel shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
(A) if not theretofore paid, the Executive's Base Salary
through the Date of Termination at the rate in effect at the time of Notice of
Termination was given;
(B) a current year MIP bonus equal to the average of the
greatest two out of the three most recent annual MIP bonuses received by the
Executive (which two greatest MIP bonuses need not represent consecutive years)
(the "Average
-15-
<PAGE>
Annual Bonus") and if Executive has been eligible to receive only one prior MIP
bonus, the latter shall serve as the sole basis for determining the Average
Annual Bonus. The applicable Average Annual Bonus shall then be prorated to
reflect the total number of full months the Executive was employed in the year
in which termination occurs;
(C) an LTIP payment reflective of the Executive's
participation in the three-year plan, so that at the time that final performance
under the LTIP is determinable and individual payouts calculated, the Executive
shall promptly receive an amount equivalent to what he would have received if he
had remained employed through the date of such payouts, less any interim
payments already made pursuant to the Executive's continuing eligibility for
full participation in the LTIP; and
(D) three times the sum of (x) the Executive's annual Base
Salary at the rate in effect at the time the Notice of Termination is given and
(y) if eligible, the Average Annual Bonus defined in Section 5(d)(i)(B), but
without proration (and, in each such case, without regard to any contributions
by Mattel for the Executive's benefit to the Mattel Personal Investment Plan
("PIP")).
(ii) Options granted to the Executive under Mattel's stock
option plans (the "Stock Option Plans") which options have been granted for more
than six months shall become
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<PAGE>
immediately exercisable and the Executive shall have a period of 90 days
following the Date of Termination (but in no event past the expiration of the
term of the option grant) to exercise all options granted under the Stock Option
Plans then exercisable or which become exercisable pursuant to this clause (ii).
In the event the Executive is age 52 or older on the Date of Termination, he
will be treated as a retiree under the Stock Option Plans, which will enable the
Executive to vest in and exercise stock options theretofore granted thereunder,
at the election of the Executive, (x) in the manner described in the immediately
preceding sentence, or (y) for a period of up to five years after the Date of
Termination (but in no event past the expiration of the term of the option
grant).
(iii) Mattel shall, promptly upon submission by the Executive of
supporting documentation, pay or reimburse to the Executive any costs and
expenses paid or incurred by the Executive which would have been payable under
Section 3(e) if his employment had not terminated.
(iv) Until the earlier of (x) the third anniversary of the Date
of Termination or (y) the date the Executive accepts other employment, Mattel
shall provide to the Executive at Mattel's expense:
(I) medical, dental, prescription drug and vision care
group insurance in accordance with the coverage in
-17-
<PAGE>
effect immediately prior to the Date of Termination (the last 18 months of the
Executive's coverage under such insurance shall be deemed to be participation
under an election to continue such benefits under the Consolidated Omnibus
Budget Reconciliation Act at Mattel's expense);
(II) outplacement services at the expense of Mattel
commensurate with those provided to terminated executives of comparable level
and made available through and at the facilities of a reputable and experienced
vendor; and
(III) continuation of country-club membership
"signatory/representative" status as in effect immediately prior to the Date of
Termination; provided that within one year after Mattel ceases to provide such
benefit, the Executive shall (a) convert the country-club membership from
"signatory/representa-tive" status under the membership provided and paid for by
Mattel to sole and personal ownership status by paying to Mattel the fair market
value of that membership as of the date Mattel ceases to provide such benefit,
less any transfer/reconveyance fees that may be required by and paid directly to
the country club by the Executive, or (b) comply with club rules in consummating
a fair, reasonable and expeditious sale of the membership and any proceeds
derived therefrom which are payable to the Executive shall belong to and must be
promptly delivered to Mattel; provided further that no such conversion or sale
shall be required and Mattel shall cause the membership to be transferred
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<PAGE>
to the Executive at no cost to the Executive (but subject to tax reporting as
imputed income applicable to the year in which the membership is transferred),
if the Executive has had the membership for at least three years.
For the three-year period after the Date of Termination, the Executive
shall remain eligible for use of personal financial and legal counseling
services through the vendor engaged and paid for by Mattel. The Executive may
continue to use the car leased by Mattel that is in the Executive's possession
on the Date of Termination until the earlier of (x) the end of the lease term or
(y) the third anniversary of the Date of Termination, at which time the
Executive may purchase the car for $1.00 (if at the end of the lease term) or
Mattel's book value (if on the third anniversary of the Date of Termination).
As of the Date of Termination, all expenses related to such leased car,
including but not limited to repairs, maintenance, gasoline, and car phone and
associated expenses, shall be the sole responsibility of the Executive.
(v) Credit shall be given for three years of service (in
addition to actual service) and for three years of attained age to be added to
the Executive's actual age for purposes of computing any service and age-related
benefits for which the Executive is eligible under the plans and programs of
Mattel, including but not limited to the 1994 Supplemental
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<PAGE>
Executive Retirement Plan (the "SERP"), the Mattel Deferred Compensation Plan,
the PIP, the Mattel Retiree Medical Plan, and the Stock Option Plans. Further,
with regard to computing the Executive's benefit under the SERP, the formula
described in Section 5(d)(i)(B) shall be utilized in calculating the maximum
benefit, namely: the formula shall be 25% of the average of the final three
years of annual Base Salary (including the calendar year in which the Date of
Termination occurs), plus the average of the greatest two out of the three most
recent annual MIP bonuses received by the Executive.
(e) Change of Control. If, within 18 months following a Change of
-----------------
Control, the Executive terminates his employment for Good Reason or Mattel or
the surviving entity terminates the Executive's employment other than for Cause
or Disability:
(i) Mattel shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
(A) if not theretofore paid, the Executive's Base Salary
through the Date of Termination at the rate in effect at the time of Notice of
Termination was given;
(B) an amount equal to the MIP bonus that would have been
payable to executives of Mattel in the same bonus
-20-
<PAGE>
category as the Executive pursuant to the Bonus Programs provided in Section
3(b) assuming, for purposes of calculating the amount of the bonus pool under
the plan, that the "maximum" amount, as that term is used in the plan, was
achieved for the current plan year (the "Maximum Annual Bonus"), with such
amount prorated to reflect the number of full months the Executive is employed
in the year in which termination occurs;
(C) an LTIP payment for the current year, assuming
achievement of the three-year maximum award, prorated to reflect the total
number of full months the Executive is employed in the year in which termination
occurs;
(D) three times the sum of (x) the Executive's annual Base
Salary at the rate in effect at the time the Notice of Termination is given and
(y) the Maximum Annual Bonus defined in Section 5(e)(i)(B), but without
proration (and, in each such case, without regard to any contributions by Mattel
for the Executive's benefit to the PIP); and
(E) the full term payout for the three-year period of the
LTIP, assuming for purposes of calculating the amount earned under the LTIP,
achievement of the three-year maximum award (including the full amount of the
premium), less any interim payments previously received by the Executive.
(ii) If it is determined that any payment or distribution by
Mattel to the Executive pursuant to Section 5(e)
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<PAGE>
(determined without regard to any additional payments required pursuant to this
sentence) (a "Payment") would be subject to the excise tax imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any
interest or penalties are incurred by the Executive with respect to such excise
tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive with respect to each Payment an additional payment
(a "Gross-Up Payment") in an amount such that after payment by the Executive of
all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payments.
(iii) In addition, the Executive shall receive the amounts and
be entitled to the benefits provided in clauses (ii), (iii), (iv) and (v) of
Section 5(d).
(f) Bonus During Cancellation Period. If Mattel notifies the
--------------------------------
Executive that the Employment Period provided in Section 1 hereof will not be
automatically extended as provided therein, the compensation of the Executive
shall continue as provided in this Agreement for the period provided therein,
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<PAGE>
except that the amount of MIP compensation payable under the Bonus Programs with
respect to each fiscal year during such period (including the year in which the
notice was given) shall be the Average Annual Bonus as determined in Section
5(d)(i)(B). Amounts payable with respect to the year in which the term specified
in Section 1 expires shall be prorated based on a fraction the numerator of
which is the number of full months from the beginning of such year until the
date of the expiration of this Agreement and denominator of which is 12.
6. Non-exclusivity of Rights. Nothing in this Agreement shall
-------------------------
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by Mattel and for
which the Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any stock option or other
agreement with Mattel or any of its affiliated companies. Except as otherwise
provided herein, amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan or program of Mattel at or
subsequent to the Date of Termination shall be payable in accordance with such
plan or program.
7. No Set Off, Payment of Fees. Except as provided here-in, Mattel's
---------------------------
obligation to make the payments provided for in this
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<PAGE>
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including without limitation any set-off,
counterclaim, recoupment, defense or other right which Mattel may have against
the Executive or others. Mattel agrees to pay, to the full extent permitted by
law, all legal fees and expenses which the Executive may reasonably incur as a
result of any contest (regardless of the outcome thereof) by Mattel or others of
the validity or enforceability of, or liability under, any provision of this
Agreement other than expenses relating to a claim by the Executive that he
terminated for Good Reason or that the termination for Cause was improper, in
which case such fees and expenses shall be paid only if the Executive prevails
in whole or in part. All amounts provided herein shall include, in each case,
interest, compounded quarterly, on the total unpaid amount determined to be
payable under this Agreement, such interest to be calculated on the basis of the
prime commercial lending rate announced by Bank of America National Trust and
Savings Association in effect from time to time during the period of such
nonpayment. In the event that the Executive shall in good faith give a Notice of
Termination for Good Reason and it shall thereafter be determined that Good
Reason did not exist, the employment of the Executive shall, unless Mattel and
the Executive shall otherwise mutually agree, be deemed to have terminated at
the Date of Termination specified in such purported
-24-
<PAGE>
Notice of Termination by mutual consent of Mattel and the Executive and
thereupon, the Executive shall be entitled to receive only those payments and
benefits which he would have been entitled to receive at such date.
8. Arbitration of Disputes
-----------------------
(a) The parties agree that any disputes, controversies or claims which
arise out of or relate to this Agreement, the Executive's employment or the
termination of his employment, including, but not limited to, any claim relating
to the purported validity, interpretation, enforceability or breach of this
Agreement, and/or any other claim or controversy arising out of the relationship
between the Executive and Mattel (or the nature of the relationship) or the
continuation or termination of that relationship, including, but not limited to,
claims that a termination was for Cause, including the determination of Mattel's
Board of Directors in accordance with Section 4(b), or for Good Reason, claims
for breach of covenant, breach of an implied covenant of good faith and fair
dealing, wrongful termination, breach of contract, or intentional infliction of
emotional distress, defamation, breach of right of privacy, interference with
advantageous or contractual relations, fraud, conspiracy or other tort or
property claims of any kind, which are not settled by agreement between the
parties, shall be settled by arbitration under the labor arbitration rules of
the
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<PAGE>
American Arbitration Association before a board of three arbitrators, as
selected thereunder.
One arbitrator shall be selected by the Executive, one by Mattel and
the third by the two persons so selected, all in accordance with the labor
arbitration rules of the American Arbitration Association then in effect. In
the event that the arbitrator selected by the Executive and the arbitrator
selected by Mattel are unable to agree upon a third arbitrator, then the third
arbitrator shall be selected from a list of seven provided by the office of the
American Arbitration Association nearest to the Executive's residence with the
parties striking names in order and the party striking first to be determined by
the flip of a coin. The arbitration shall be held in a location to be mutually
agreed upon by the parties. In the absence of agreement, the Chairman of the
Board of Mattel shall determine the location.
(b) In consideration of the parties' agreement to submit to
arbitration all disputes with regard to this Agreement and/or with regard to any
alleged contract, or any other claim arising out of their conduct, the
relationship existing hereunder or the continuation or termination of that
relationship, and in further consideration of the anticipated expedition and the
minimizing of expense resulting from this arbitration remedy, the
-26-
<PAGE>
arbitration provisions of this Agreement shall provide the exclusive remedy, and
each party expressly waives any right he or it may have to seek redress in any
other forum.
(c) Any claim which either party has against the other party which
could be submitted for resolution pursuant to this Section 8 must be presented
in writing by the claiming party to the other within one year of the date the
claiming party knew or should have known of the facts giving rise to the claim,
except that claims arising out of or related to the termination of the
Executive's employment must be presented by him within one year after the Date
of Termination. Unless the party against whom any claim is asserted waives the
time limits set forth above, any claim not brought within the time periods
specified shall be waived and forever barred.
(d) Mattel will pay all costs and expenses of the arbitration to the
extent provided in this Section 8. In the event expenses are not paid by Mattel,
and without diminishing the Executive's right to reimbursement as provided in
this Section, costs and expenses shall be paid as follows: (x) the expenses of
the neutral arbitrator and of a transcript of any arbitration proceeding shall
be divided equally between the Executive and Mattel; and (y) each party shall
bear the expenses of the arbitrator selected by it and of the witnesses it
calls.
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<PAGE>
(e) Any decision and award or order of a majority of the arbitrators
shall be binding upon the parties hereto and judgment thereon may be entered in
the Superior Court of the State of California or any other court having
jurisdiction.
(f) Each of the above terms and conditions of this Section 8 shall
have separate validity and the invalidity of any part thereof shall not affect
the remaining parts.
(g) Any decision and award or order of a majority of the arbitrators
shall be final and binding between the parties as to all claims which were
raised in connection with the dispute to the full extent permitted by law. In
all other cases, the parties agree that a decision of a majority of arbitrators
shall be a condition precedent to the institution or maintenance of any legal,
equitable, administrative, or other formal proceeding by the Executive in
connection with the dispute, and that the decision and opinion of the board of
arbitrators may be presented in any other forum on the merits of the dispute.
9. General Release. The Executive acknowledges and agrees that this
---------------
Agreement includes the entire agreement and understanding between the parties
with regard to the Executive's employment, the termination thereof during the
Employment Period, and all amounts to which the Executive shall be entitled
whether
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<PAGE>
during the term of employment or upon termination thereof. Accordingly,
upon Mattel's fulfilling its obligations to the Executive hereunder, the
Executive, on behalf of himself and his successors, assigns, heirs and any and
all other persons claiming through the Executive, if any, and each of them,
shall and does hereby forever relieve, release, and discharge Mattel and its
respective predecessors, successors, assigns, owners, attorneys,
representatives, affiliates, parent corporations, subsidiaries (whether or not
wholly-owned), divisions, partners and their officers, directors, agents,
employees, servants, executors, administrators, accountants, investigators,
insurers, and any and all other related individuals and entities, if any, and
each of them, in any and all capacities, from any and all claims, debts,
liabilities, demands, obligations, liens, promises, acts, agreements, costs and
expenses (including, but not limited to, attorneys' fees), damages, actions and
causes of action, of whatever kind or nature, including, without limitation, any
statutory, civil or administrative claim, or any claim, arising out of acts or
omissions occurring before the execution of this Agreement, whether known or
unknown, suspected or unsuspected, fixed or contingent, apparent or concealed
(collectively referred to as "claims"), including, but not limited to, any
claims based on, arising out of, related to or connected with the subject matter
of this Agreement, the Executive's employment or the termination thereof, and
any and all facts in any manner arising
-29-
<PAGE>
out of, related to or connected with the Executive's employment with, or
termination of employment from, Mattel or any of its related entities,
including, but not limited to, any claims arising from rights under federal,
state, and local laws prohibiting discrimination on the basis of race, national
origin, sex, religion, age, marital status, pregnancy, handicap, ancestry,
sexual orientation, or any other form of discrimination, and any common law
claims of any kind, including, but not limited to, contract, tort, and property
rights including, but not limited to, breach of contract, breach of the implied
covenant of good faith and fair dealing, tortious interference with contract or
current or prospective economic advantage, fraud, deceit, misrepresentation,
defamation, wrongful termination, infliction of emotional distress, breach of
fiduciary duty, and any other common law claim of any kind whatever.
Upon Mattel's fulfilling its obligations to the Executive here-under,
the Executive expressly waives any and all rights under Section 1542 of the
Civil Code of the State of California, and all other federal or state statutory
rights, rules, and principles of common law or equity, including without
limitation those of any jurisdiction, government, or political subdivision
thereof, similar to Section 1542 ("similar provision"). Thus the Executive may
not invoke the benefits of Section 1542 or any
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<PAGE>
similar provision in order to prosecute or assert in any manner any claims
released hereunder. Section 1542 provides as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
10. Confidential Information. The Executive shall hold in a
------------------------
fiduciary capacity for the benefit of Mattel all secret or confidential
information, knowledge or data relating to Mattel or any of its affiliated
companies, and their respective businesses, which shall have been obtained by
the Executive during his employment by Mattel or any of its affiliated companies
and which shall not be public knowledge and will continue to be bound by the
provisions of the Patent and Confidence Agreement previously executed by the
Executive. After termination of the Executive's employment with Mattel, he
shall not, without the prior written consent of Mattel, communicate or divulge
any such information, knowledge or data to anyone other than Mattel and those
designated by it.
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<PAGE>
11. Successors.
----------
(a) This Agreement is personal to the Executive and without the prior
written consent of Mattel shall not be assignable by the Executive otherwise
than by will or the laws of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
Mattel and its successors. Mattel shall require any successor to all or
substantially all of the business and/or assets of Mattel, whether direct or
indirect, by purchase, merger, consolidation, acquisition of stock, or
otherwise, by an agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent as Mattel would be required to perform if no such succession
had taken place.
12. Amendment; Waiver. This Agreement contains the entire agreement
--------- ------
between the parties with respect to the subject matter hereof and may be
amended, modified or changed only by a written instrument executed by the
Executive and Mattel. No provision of this Agreement may be waived except by a
writing executed and delivered by the party sought to be charged. Any such
written waiver will be effective only with respect to the event or
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<PAGE>
circumstance described therein and not with respect to any other event or
circumstance, unless such waiver expressly provides to the contrary.
13. Miscellaneous.
-------------
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of California, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(b) All notices and other communications hereunder shall be in
writing; shall be delivered by hand delivery to the other party or mailed by
registered or certified mail, return receipt requested, postage prepaid; shall
be deemed delivered upon actual receipt; and shall be addressed as follows:
if to the Executive:
--------------------
Harry J. Pearce
c/o Mattel, Inc.
333 Continental Blvd.
El Segundo, CA 90245
if to Mattel:
-------------
MATTEL, INC.
333 Continental Blvd.
El Segundo, CA 90245
ATTENTION: Ned Mansour
or to such other address as either party shall have furnished to the other in
writing in accordance herewith.
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<PAGE>
(c) Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction will not invalidate or render unenforceable such provision in any
other jurisdiction.
(d) Mattel may withhold from any amounts payable under this Agreement
such Federal, state or local taxes as shall be required to be withheld pursuant
to any applicable law or regulation.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date first set forth above.
EXECUTIVE:
/s/ Harry J. Pearce
-----------------------------------
Harry J. Pearce
MATTEL: MATTEL, INC.,
a Delaware corporation
By: /s/ Ned Mansour
-------------------------------
Ned Mansour
President, Corporate Operations
ATTEST:
/s/ Mary L. Waller
- ---------------------------------
Assistant Secretary
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<PAGE>
EXHIBIT 10.12
MATTEL, INC.
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Eligibility......................................................... 1
2. Participation....................................................... 1
(a) Election to Participate.................................... 1
(b) Enrollment Form............................................ 1
3. Deferred Compensation Accounts...................................... 2
(a) Investment Election........................................ 2
(b) Stock Equivalent Account................................... 2
(i) Determination of Credited Amounts.................. 2
(ii) Recapitalization or Reorganization of
Company............................................ 3
(iii) Shares Subject to Plan............................. 3
(c) Interest Accrual Account................................... 3
(d) Change of Investment Elections............................. 3
(i) Future Deferrals................................... 3
(ii) Prior Deferrals.................................... 3
(iii) Transition Election................................ 4
(e) Administrative Discretion.................................. 4
4. Distribution........................................................ 4
(a) Distribution Election...................................... 4
(b) Distribution Options....................................... 4
(c) Form of Distributions...................................... 4
(d) Competitive Activity....................................... 5
(e) Death...................................................... 5
(f) Installment Distributions.................................. 5
(g) Prior Agreements Superseded................................ 5
(h) Withdrawals................................................ 5
5. Miscellaneous....................................................... 6
(a) Assignment Prohibited...................................... 6
(b) Benefits Unfunded.......................................... 6
(c) Grantor Trust.............................................. 6
(d) Plan Year.................................................. 7
(e) Nonforfeitable Benefit..................................... 7
(f) Amendment.................................................. 7
(g) Termination................................................ 7
(h) Withholding................................................ 7
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(i) Governing Law.............................................. 8
(j) Gender, Tense, and Headings................................ 8
(k) Successors and Assigns..................................... 8
(l) Receipt or Release......................................... 8
(m) Plan Administrator......................................... 8
6. Definitions......................................................... 9
(a) Account.................................................... 9
(b) Administrator.............................................. 9
(c) Assumed Accounts........................................... 9
(d) Beneficiary................................................ 9
(e) Board...................................................... 9
(f) Change in Control.......................................... 9
(g) Combined Voting Power......................................10
(h) Company....................................................10
(i) Deferrals..................................................10
(j) Effective Date.............................................10
(k) Enrollment Form............................................10
(l) Exchange Act...............................................10
(m) Independent Plan Administrator.............................10
(n) Participant................................................10
(o) Person.....................................................11
(p) Plan.......................................................11
(q) Plan Year..................................................11
(r) Prior Agreement............................................11
(s) Severance..................................................11
(t) Transaction................................................11
(u) Valuation Date.............................................11
(v) Voting Securities..........................................11
</TABLE>
-ii-
<PAGE>
MATTEL, INC.
DEFERRED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS
1. Eligibility
Each member of the Board of Mattel, Inc. ("Company") who is not an
employee of the Company, or of any of its subsidiaries, is eligible to
participate in this Deferred Compensation Plan for Non-Employee Directors
("Plan"). This Plan includes account balances attributable to certain Directors
who, prior to the date of adoption of this Plan, were parties to individual
deferred compensation agreements with the Company under the terms of a Prior
Agreement. This Plan constitutes an amendment and restatement that supersedes
any such Prior Agreements and the obligations to any Director under any such
Prior Agreement shall be assumed under this Plan ("Assumed Accounts"). Any such
Director previously covered by an individual agreement who has Assumed Accounts
under this Plan shall continue to accrue amounts attributable to dividends and
appreciation on any hypothetical shares of Common Stock in the Stock Equivalent
Account portion as provided in this Plan and to accrue interest on any Interest
Accrual Account portion, notwithstanding that such Director is ineligible to or
does not otherwise participate in this Plan.
2. Participation
(a) Election to Participate. Prior to the beginning of any calendar
-----------------------
year, or, in the case of newly elected Directors, within 30 days of such
election, each eligible Director may elect to participate in the Plan by
directing that all or any part of the compensation which would otherwise have
been payable currently for services as a Director (including fees payable for
services as a member of a committee of the Board) during such calendar year, or,
in the case of newly elected Directors, during the remainder of such calendar
year, shall be credited to a deferred compensation account ("Account") subject
to the terms of the Plan. With respect to calendar year 1998, the year this
Plan is adopted, each eligible Director shall have a period of 60 days after the
adoption of this Plan to elect to participate in the Plan with respect to
compensation payable after the date of election.
(b) Enrollment Form. Such an election to participate in the Plan
---------------
shall be in the form of an enrollment form ("Enrollment Form") executed by the
Director and the Company and filed with the Secretary of the Company or his or
her delegate. The specifications of this Plan that apply to any participating
Director are contained in such separate Enrollment Form executed by the Company
and the Participant. The Enrollment Form constitutes a part of this Plan and
its terms are incorporated into the Plan. An election related to fees otherwise
payable currently in any calendar year shall become irrevocable on the last day
prior to the beginning of such calendar year, or, in the case of new Directors,
on the 30th day after becoming a Director. An election shall continue until a
Director ceases to be a Director or until he or she terminates or modifies such
election by written notice. Any such termination or modification shall become
effective as of the end of the calendar year in which such notice is given with
respect to all fees otherwise payable in subsequent calendar years. A Director
who has filed a
<PAGE>
termination of election may thereafter again file an election to
participate for any calendar year or years subsequent to the filing of such
election.
3. Deferred Compensation Accounts
(a) Investment Election. At the time of election to participate in
-------------------
the Plan under Section 2(a) above, a Director shall also designate the
percentage of such Deferrals to be credited to the Stock Equivalent Account
portion of the Director's Account and the percentage to be credited to the
Interest Accrual Account portion of such Account.
(b) Stock Equivalent Account.
------------------------
(i) Determination of Credited Amounts. Deferrals credited to the
---------------------------------
Stock Equivalent Account portion of a Director's Account shall be applied on the
last business day of the month in which occurs the date the related compensation
is or would be otherwise paid to the hypothetical purchase of whole shares of
Common Stock determined by dividing the amount of such compensation by the price
of a share of the Company's common stock, par value $1.00 per share (the "Common
Stock"). Amounts remaining after the hypothetical purchase of whole shares of
Common Stock shall be credited to the Interest Accrual Account until the next
Valuation Date when the remaining principal amount shall be credited to the
Stock Equivalent Account and applied to the hypothetical purchase of Common
Stock. The Director's Account (including any portion of an Assumed Account
represented by the Stock Equivalent Account) shall also be credited on the last
business day of the month in which cash dividends are paid with a hypothetical
number of shares of Common Stock equivalent to any cash dividend payment on the
number of shares of Common Stock equal to the number of hypothetical shares of
Common Stock in the Director's Stock Equivalent Account on the record date for
such dividend. Such amount shall then be converted to a number of additional
hypothetical shares determined by dividing such amount by the price of a share
of Common Stock. The price of a share of Common Stock on the last day of the
month in which occurs any compensation or dividend payment date shall be the
closing price of a share of Common Stock for the last trading day in that month.
The closing price for each day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Common Stock is
not listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Common Stock is listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use, or, if on any such date the Common
Stock is not quoted by any such organization, the average of the closing bid and
asked prices as furnished by the professional market maker making a market in
the Common Stock.
<PAGE>
(ii) Recapitalization or Reorganization of Company. In the
---------------------------------------------
event of any change in outstanding Common Stock by reason of any stock dividend
or split, recapitalization, merger, consolidation, combination or exchange of
shares, spin-off or other similar corporate change, the Board shall make such
adjustments, if any, that it deems appropriate in the number of hypothetical
shares of Common Stock then credited to Directors' Accounts (including any
portion of an Assumed Account represented by the Stock Equivalent Account). Any
and all such adjustments shall be conclusive and binding upon all parties
concerned.
(iii) Shares Subject to Plan. The maximum number of
----------------------
hypothetical shares of Common Stock that may be maintained in the Stock
Equivalent Account portion of all Directors' Accounts may not exceed two million
shares (including any portion of an Assumed Account represented by the Stock
Equivalent Account). This number is subject to adjustment to take into
consideration adjustment in the number of outstanding shares of Common Stock as
described in the preceding Section 3(b)(ii).
(c) Interest Accrual Account. Deferrals credited to the Interest
------------------------
Accrual Account portion of a Director's Account (including any portion of an
Assumed Account represented by the Interest Accrual Account) shall bear interest
from the last day of the month in which occurs the date the related compensation
is or would otherwise be paid. The interest credited will be compounded monthly
and credited at the end of each Valuation Date. For all amounts, whenever
credited, the rate of interest credited thereon, as of the end of each Valuation
Date ending after the date of adoption of this Plan by the Board, shall be
determined by and may be changed by the Administrator, in its sole discretion,
from time to time. The initial interest rate credited to the Interest Accrual
Account shall be equal to 125% of the average annual yield as of the beginning
of the calendar year for U. S. Treasury notes with maturities of ten years. The
applicable Treasury interest rate shall be determined annually by the Chief
Financial Officer or Controller of the Company as of the beginning of the
calendar year, based on an official publication of a U. S. government agency.
Any change in such interest rate or the manner of determining the interest rate
shall take effect only for accruals of interest after the change is approved by
the Administrator.
(d) Change of Investment Elections.
------------------------------
(i) Future Deferrals. An election to invest Deferrals in a
----------------
Stock Equivalent Account or an Interest Accrual Account may be changed
prospectively once each year, in the manner and at the time specified by the
Administrator, by giving not less than ten (10) days advance notice in writing
of such election to the Secretary of the Company on a form designated by the
Plan Administrator for such purpose. Such change, if timely, shall be effective
with respect to amounts deferred following the month in which such election is
received and thereafter.
(ii) Prior Deferrals. Except as permitted in Section
---------------
3(d)(iii) hereof, no part of the amounts previously credited to a Director's
Stock Equivalent Account or Interest Accrual Account may be transferred between
Accounts.
<PAGE>
(iii) Transition Election. Notwithstanding anything to the
-------------------
contrary in Section 3(d)(ii) hereof, any Director previously covered by an
individual agreement who has Assumed Accounts under this Plan shall have a
period of 60 days after the adoption of this Plan to transfer amounts previously
credited to such Director's Interest Accrual Account to such Director's Stock
Equivalent Account.
(e) Administrative Discretion. The Administrator may determine at
-------------------------
any time in its sole discretion that no additional Deferrals shall be credited
to the Stock Equivalent Account of any Director. In the event all Stock
Equivalent Accounts are frozen, additional Deferrals will be credited to the
Interest Accrual Account until such time as the Administrator permits a change
in election.
4. Distribution
(a) Distribution Election. At the time of election to participate in
---------------------
the Plan, a Director shall also make elections with respect to the timing and
method of distribution (during the Director's lifetime or in the event of the
Director's death) of amounts deferred under the Plan, plus accumulated earnings.
Such elections shall be contained in the document referred to in Section 2(b),
executed by the Director and filed with the Secretary of the Company, or his or
her delegate. The election with respect to the method of distribution during
the Director's lifetime of fees for any calendar year shall become irrevocable
on the last day prior to the beginning of such calendar year. The election
related to the distribution in the event of the Director's death, including the
designation of a Beneficiary or Beneficiaries, may be changed by the Director at
any time, by filing the appropriate document with the Secretary of the Company.
(b) Distribution Options. A Director may elect to receive amounts
--------------------
credited to his or her Account in one payment or in ten (10) equal annual
installments; provided, however, that the number of annual installments may not
extend beyond the life expectancy of the Director, determined as of the date the
first installment is paid. The election shall direct that the first installment
(or the single payment if the Director has so elected) be paid no later than
March 30 of the Plan Year following either (i) the Plan Year in which the
Director has a Severance and ceases to be a Director of the Company, or (ii the
later of (i) above or the year in which the Director attains the age specified
in such election, which age shall not be later than age 72. Each distribution
shall be made pro-rata from amounts credited to the Interest Accrual Account
portion and to the Stock Equivalent Account portion of the Director's Account on
the applicable payment date. Each distribution shall be determined by
multiplying the value of the Director's Account by a fraction. The numerator of
the fraction shall be 1 and the denominator of the fraction shall be the number
of annual installments remaining to be paid.
(c) Form of Distributions. All distributions from the Interest
---------------------
Accrual Account shall be in cash. All distributions from the Stock Equivalent
Account shall be in shares of Common Stock equal in value to the value of the
Stock Equivalent Account. For this purpose, the value of the Stock Equivalent
Account distributed on any payment date shall be determined
<PAGE>
by multiplying the number of such hypothetical shares of Common Stock allocated
to the Stock Equivalent Account by the price of a share of Common Stock, as
determined pursuant to Section 3(b)(i) with respect to the valuation period
ending coincident with or immediately prior to the date of the distribution. In
no event shall the Company be required to issue fractional shares in connection
with a distribution of a Director's Stock Equivalent Account. The value of
fractional hypothetical shares of Common Stock shall be distributed in cash.
(d) Competitive Activity. Notwithstanding an election pursuant to
--------------------
Section 4(a), in the event a Director engages in any competitive activity, as
determined in accordance with and pursuant to the terms and conditions of the
Company's non-competition guidelines, the entire balance in the Director's
Account, including earnings, shall be paid immediately in a single payment.
(e) Death. A Director may elect that, in the event the Director
-----
should die before full payment of all amounts credited to the Director's
Account, the balance of the Account shall be distributed according to the method
designated by the Director pursuant to Section 4(a) hereof to the Beneficiary or
Beneficiaries designated in writing by the Director, or if no designation has
been made, to the estate of the Director. The first installment (or the single
payment if the Director has so elected) shall be paid on the first day of the
calendar year following the year of death. The Board or the
Compensation/Options Committee thereof may, in its sole discretion, decide to
accelerate the timing of such payments in any manner deemed appropriate. In
connection with such decision, the Board or the Committee may (but shall not be
required to) take into consideration the desire(s) of the Beneficiary or
Beneficiaries of such deceased Director.
(f) Installment Distributions. Installments subsequent to the first
-------------------------
installment to the Director, or to a Beneficiary or to the Director's estate,
shall be paid on the first business day of each succeeding calendar year until
the entire amount credited to the Director's Account shall have been paid. The
balance of the Account held pending distribution shall continue to be credited
with earnings, determined in accordance with Section 3.
(g) Prior Agreements Superseded. Payments of amounts credited to a
---------------------------
Director's Account under this Plan shall not be duplicative of payments, if any,
received by a Director under any Prior Agreement that became subject to this
Plan as Assumed Accounts which payments shall be a complete offset to any
payments under this Plan. The Board may, as a prerequisite to the commencement
of any installments or lump-sum payment to any Director or Beneficiary under
this Plan, obtain a written acknowledgment, in a form reasonably satisfactory to
the Board, that such installments or payment represent a complete satisfaction
of any amounts deferred or earnings accrued under the prior individual deferred
compensation agreement.
(h) Withdrawals. A Director (or former Director) participating in
-----------
the Plan may at any time elect to receive a distribution of all or any portion
of the Interest Accrual Account credited to his or her Account under the Plan
(less a substantial penalty). Amounts credited to the Stock Equivalent Account
shall not be available for distribution under this Subsection (h).
<PAGE>
Requests for distributions shall be submitted in writing (on a form approved for
that purpose) to the Secretary of the Company or his or her delegate specifying
the amount to be withdrawn. Distributions from the Director's (or former
Director's) Interest Accrual Account under the Plan pursuant to this Subsection
(h) will at all times be subject to (i) reduction for applicable state or
federal income tax withholdings, if any, and (ii a substantial penalty equal to
at least six percent (6%) of the amount of the requested withdrawal. The
Administrator, upon reasonable notice to Participants, may change the penalty
percentage to which withdrawals are subject, provided such penalty shall never
be less than six percent (6%). The amount of any penalty shall be treated as a
forfeiture and shall not be subject to reinstatement. Distributions pursuant to
this Subsection (h) shall be payable in a single lump sum, in cash, within
thirty (30) days of submission of the completed distribution form. The Company
and the Administrator shall be released from any further liability for the
withdrawn benefit amount and the penalty amount. In addition, a Participant who
makes a withdrawal shall not be eligible to make additional Deferrals to this
Plan during the calendar year in which the withdrawal is made and the next
following calendar year.
5. Miscellaneous
(a) Assignment Prohibited. The right of a Director to any deferred
---------------------
fees and/or earnings thereon shall not be subject to assignment by the Director.
(b) Benefits Unfunded. Except as provided in Section 5(c), the
-----------------
benefits provided by this Plan shall be unfunded. All amounts payable under
this Plan to the participating Directors shall be paid from the general assets
of the Company, and nothing contained in this Plan shall require the Company to
set aside or hold in trust any amounts or assets for the purpose of paying
benefits to any Director. This Plan shall create only a contractual obligation
on the part of the Company, and participating Directors shall have the status of
a general unsecured creditor with respect to the benefit obligations hereunder
or any other obligation of the Company to pay benefits pursuant hereto. Any
funds of the Company available to pay benefits pursuant to the Plan shall be
subject to the claims of general creditors of the Company, and may be used for
any purpose by the Company.
(c) Grantor Trust. Although the Company is responsible for the
-------------
payment of all benefits under the Plan, the Company may, in its discretion,
contribute funds or assets (including insurance policies on the life of any or
all Participants and securities issued by the Company) to a grantor trust for
the purpose of paying benefits under this Plan and to assist it in accumulating
shares of Common Stock and cash needed to fulfill its obligations under this
Plan in the event of a Change in Control. Such trust may be irrevocable, but
assets of the trust shall be subject to the claims of creditors of the Company
or any adopting affiliate. To the extent any benefits provided under the terms
of the Plan are actually paid from the trust, the Company or such adopting
affiliate shall have no further obligation with respect thereto. To the extent
any benefits provided under the terms of the Plan are not paid from the trust,
such benefits shall remain the obligation of and shall be paid by the Company or
the adopting affiliate. References to payments by the Company shall be deemed
to include payments by the Company or by an adopting affiliate, as the context
may require. The participating Directors
<PAGE>
shall have the status of unsecured creditors insofar as their legal claim for
benefits under the Plan and the participating Directors shall have no security
interest or preferred claim in or to the assets of any such grantor trust.
(d) Plan Year. The period with respect to which the records of the
---------
Plan are maintained (the "Plan Year") shall be the twelve consecutive month
period ending December 31. The Controller of the Company shall, at least
annually at the end of each Plan Year, prepare and distribute written reports to
the participating Directors and to the Compensation/Options Committee of the
Board that set forth the amounts or the number of hypothetical shares of Common
Stock credited to each Director's Account.
(e) Nonforfeitable Benefit. A participating Director's interest in
----------------------
his Account shall at all times be 100% vested and nonforfeitable.
(f) Amendment. The Company shall have the right to amend this Plan
---------
in whole or in part from time to time by resolution of the Board, and to amend
and cancel any amendments; provided, however, that no action under this Section
shall cancel or reduce the amount of the Director's previously accrued vested
benefits. An amendment shall be in writing and be adopted by the Board. The
action of the Board adopting any amendment may, but is not required to, be
evidenced by the execution of such amendment by a duly authorized officer of the
Company. The participating Directors shall be bound thereby.
(g) Termination. The Company expects to continue this Plan
-----------
indefinitely, but does not obligate itself to do so. The Company reserves the
right to discontinue and terminate the Plan at any time, for any reason
(including a change, or an impending change, in the tax laws of the United
States or of any state), by resolution of the Board. Termination of the Plan
shall be binding on the participating directors, but in no event may such
termination reduce the Directors' previously accrued vested benefits. If this
Plan is terminated, the Directors' previously accrued vested benefits shall be
paid as soon as reasonably practicable after the first day of the month
following the termination.
(h) Withholding. If the whole or any part of any Director's benefit
-----------
shall become liable for the payment of any estate, inheritance, income,
employment or other tax which the Company is required to pay or withhold, the
Company shall have the full power and authority to withhold and pay such tax out
of any monies or other property in its hand for the benefit of the Director
whose benefits hereunder are so liable. Prior to making any payment, the
Company may require such releases or other documents from any lawful taxing
authority as it shall deem necessary. To the extent benefits paid hereunder are
wages or compensation, the Company shall be entitled to deduct, withhold and pay
any applicable income or employment taxes from amounts otherwise payable to a
participating Director hereunder.
<PAGE>
(i) Governing Law. This Plan shall be construed, administered, and
-------------
governed in all respects in accordance with the laws of the State of California.
If any provisions of this instrument shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall continue to be fully effective.
(j) Gender, Tense, and Headings. In this Plan, whenever the context
---------------------------
so indicates, the singular or plural number and the masculine, feminine, or
neuter gender shall be deemed to include the other. Headings and subheadings in
this Plan are inserted for convenience of reference only and are not considered
in the construction of the provisions hereof.
(k) Successors and Assigns. This Plan shall inure to the benefit of,
----------------------
and be binding upon, the parties hereto and their successors and assigns;
provided, however, subject to the provisions of applicable law regarding
domestic relations orders, that the benefits hereunder shall not be assignable
or transferable and, except as provided by Section 5(h), any purported transfer,
assignment, encumbrance, or attachment thereof shall be void and of no effect.
In the event of a dispute involving any individual's right to receive the
benefit hereunder, the Company may enter an interpleader action. Payment of
the benefit to a court of competent jurisdiction with proper notice to the
appropriate parties in dispute shall be in full satisfaction of all claims
against the Company as to the Plan, and shall be equivalent to a receipt and
release.
(l) Receipt or Release. Any payment to a Director or Beneficiary in
------------------
accordance with the provisions of this Plan shall, to the extent thereof, be in
full satisfaction of all claims against the Company, and the Administrator may
require such Participant, as a condition precedent to such payment, to execute a
receipt and release to such effect. Amounts owed to the Company by any
participating Director may be setoff from the benefits distributed under this
Plan, provided the Administrator designates the amount and description of the
setoff amounts and any such setoff shall be treated as a distribution that
satisfies the corresponding distribution obligation under this Plan.
(m) Plan Administrator. The Compensation/Options Committee of the
------------------
Board shall be the Plan Administrator and shall have discretionary authority to
construe and interpret the Plan terms and to make all determinations relating to
its administration, including the determination of disputed benefit claims.
Action of the Administrator may be taken with or without a meeting; provided,
however, that any action shall be taken only upon the vote or other affirmative
expression of a majority of the Committee members qualified to vote with respect
to such action. If a member of the Committee is a participant whose benefits
are subject to the Plan, such member shall not participate in any decision which
solely affects his
<PAGE>
or her status as a participant. In the event the Compensation/Options Committee
becomes deadlocked on the determination of any disputed benefit claim, the
determination of such claim shall be determined by the full Board. The Committee
or the Board, as the case may be, shall be authorized to adopt rules and
procedures relating to its duties under the Plan. If the Company creates a trust
as described in Section 6.2 hereof, and, if such trust provides for an
Independent Plan Administrator, then, following a Change in Control of the
Company, the Independent Plan Administrator (or any successor Independent Plan
Administrator) under the trust shall serve as Administrator of this Plan, so
long as such entity is serving as Independent Plan Administrator under the
trust.
6. Definitions
(a) Account. The record maintained by the Administrator to determine
-------
each Participant's interest under this Plan. Such Account may be divided into
subaccounts and shall be reflected as a book reserve entry in the Company's
accounting records.
(b) Administrator. The Compensation/Options Committee of the Board
-------------
designated pursuant to Section 5(m) to manage and administer the Plan.
(c) Assumed Accounts. The amount of deferred compensation credited
----------------
under a Prior Agreement that is automatically credited to and governed by the
terms of this Plan.
(d) Beneficiary. The person or persons (natural or otherwise)
-----------
designated by a Participant in accordance with Section 4(a) to receive any
undistributed benefits under the Plan at the time of the Participant's death.
(e) Board. The Board of Directors of the Company or the Compensation
-----
and Options Committee of the Board of Directors.
(f) Change in Control. A "Change in Control" shall be deemed to have
-----------------
occurred on:
(i) The "Distribution Date" as that term is defined in Section
1(h) of the Company's Rights Agreement dated February 7, 1992, as it may be
amended from time to time. The definition of "Distribution Date" contained in
the Company's Rights Agreement shall continue to apply, notwithstanding the
expiration or termination of that agreement; or
(ii) The date (during any period of two consecutive calendar
years) that individuals who at the beginning of such period constituted the
Company's Board cease for any reason (other than natural causes, including
death, disability or retirement) to constitute a majority thereof; or
(iii) The date the stockholders of the Company approve:
(A) A plan of complete liquidation of the Company;
<PAGE>
(B) An agreement for the sale or disposition of all or
substantially all of the assets of the Company; or
(C) A merger, consolidation, or reorganization of the
Company with or involving any other corporation, other than a merger,
consolidation, or reorganization that would result in the voting stock of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting stock of the surviving
entity) at least eighty percent (80%) of the combined voting power of the stock
that is outstanding immediately after the merger, consolidation, or
reorganization, unless the Board of the Company determines by a majority vote
prior to the merger, consolidation, or reorganization that no Change in Control
will occur as a result of such transaction; or
(iv) The date a "Change in Control" occurs within the meaning of
the term defined in the grantor trust agreement established under Section 6.2
hereof.
(g) Combined Voting Power. The aggregate votes entitled to be cast
---------------------
generally in the election of directors of a corporation by holders of then
outstanding Voting Securities of such corporation.
(h) Company. Mattel, Inc., a Delaware corporation.
-------
(i) Deferrals. The amount credited to the Participant's Account under
---------
this Plan to reflect his interest in the Plan attributable to his elective
deferrals of Directors' fees.
(j) Effective Date. The Effective Date of this Plan shall be July 1,
--------------
1998.
(k) Enrollment Form. The form executed by the Company and the
---------------
Participant which sets forth the Participant's Deferral elections and other
specifications of this Plan applicable to the Participant.
(l) Exchange Act. The Securities Exchange Act of 1934, as amended
------------
from time to time, or any successor statute.
(m) Independent Plan Administrator. A person, persons or entity
------------------------------
which, prior to a Change in Control has accepted in writing the position of
Independent Plan Administrator under the grantor trust agreement established
under Section 5(c) hereof. The appointment of the Independent Plan
Administrator shall be determined under the provisions of the grantor trust
agreement established under Section 5(c) hereof.
(n) Participant. A Director of the Company or any participating
-----------
affiliate that has adopted the Plan who completes an Enrollment Form and has not
received a complete distribution of the amounts credited to his Account.
<PAGE>
(o) Person. Any individual, entity (including, without limitation, any
------
corporation, partnership, trust, joint venture, association or governmental
body) or group (as defined in (S) 14(d)(3) or (S) 15(d)(2) of the Exchange Act
and the rules and regulations thereunder); provided, however, that Person shall
not include the Company, any of its subsidiaries, or any employee benefit plan
of the Company or any of its majority-owned subsidiaries or any entity
organized, appointed or established by the Company or such subsidiary for or
pursuant to the terms of any such plan.
(p) Plan. The Mattel, Inc. Deferred Compensation Plan for Non-Employee
----
Directors as described herein and in the Enrollment Form entered into between
the Company and the Director designated therein, as such Plan and Enrollment
Form may hereafter be amended.
(q) Plan Year. The period with respect to which the records of the
---------
Plan are maintained which shall be the twelve consecutive month period ending
December 31.
(r) Prior Agreement. An unfunded, nonqualified, deferred compensation
---------------
agreement entered into by and between the Company and an individual Director
prior to the Effective Date of this Plan. This Plan constitutes an amendment
and restatement of any such Prior Agreement.
(s) Severance. A Participant's voluntary or involuntary termination of
---------
service as a Director with the Company for any reason at any time.
(t) Transaction. Any merger, consolidation or recapitalization of the
-----------
Company (or, if the capital stock of the Company is affected, any subsidiary of
the Company); or any sale, lease, or other transfer (in one transaction or a
series of transactions contemplated or arranged by any party as a single plan)
of all or substantially all of the assets of the Company.
(u) Valuation Date. The last day of each month within the Plan Year
--------------
and such other dates as may be determined by the Administrator for valuing
Participant Accounts.
(v) Voting Securities. All securities of a corporation having the
-----------------
right under ordinary circumstances to vote in an election of the board of
directors of such corporation.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its
duly authorized officer.
MATTEL, INC.
Dated: August 17, 1998 By: /s/ Alan Kaye
-------------------- --------------------
<PAGE>
EXHIBIT 10.14
MATTEL, INC.
DEFERRED COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. GENERAL.................................................... 1
1.1 Purpose.................................................... 1
1.2 Enrollment Form............................................ 1
SECTION 2. DEFINITIONS................................................ 1
2.1 Account.................................................... 1
2.2 Administrator.............................................. 1
2.3 Beneficiary................................................ 1
2.4 Board of Directors......................................... 1
2.5 Change in Control.......................................... 1
2.6 Code....................................................... 2
2.7 Combined Voting Power...................................... 2
2.8 Company.................................................... 2
2.9 Company Matching Credits................................... 2
2.10 Compensation............................................... 2
2.11 Deferrals.................................................. 3
2.12 Disability................................................. 3
2.13 Effective Date............................................. 3
2.14 Enrollment Form............................................ 3
2.15 ERISA...................................................... 3
2.16 Exchange Act............................................... 3
2.17 Independent Plan Administrator............................. 4
2.18 Investment Funds........................................... 4
2.19 Late Retirement Date....................................... 4
2.20 Normal Retirement Date..................................... 4
2.21 Participant................................................ 4
2.22 Person..................................................... 4
2.23 Personal Investment Plan................................... 4
2.24 PIP Excess Plan............................................ 4
2.25 Plan....................................................... 4
2.26 Plan Year.................................................. 5
2.27 Predecessor Plan........................................... 5
2.28 Severance.................................................. 5
2.29 Transaction................................................ 5
2.30 Transfer Credits........................................... 5
2.31 Valuation Date............................................. 5
2.32 Voting Securities.......................................... 5
2.33 Year of Service............................................ 5
</TABLE>
-i-
<PAGE>
Page
----
SECTION 3. PARTICIPATION.............................................. 5
3.1 Eligibility................................................ 5
3.2 Deferral Election.......................................... 6
3.3 Time and Manner of Election................................ 6
(a) Base Salary.......................................... 6
(b) Short-Term Incentive Bonuses......................... 6
(c) Long-Term Incentive Bonuses.......................... 6
(d) Cash Award Payments.................................. 6
(e) Form of Election..................................... 7
3.4 Change of Deferral Election................................ 7
3.5 Investment Funds - Election and Change..................... 7
SECTION 4. ACCOUNTS................................................... 8
4.1 Establishment of Accounts.................................. 8
4.2 Accounting for Participant's Interests..................... 8
(a) Base Salary Deferral Subaccount...................... 8
(b) Short-Term Incentive Bonus Subaccount................ 8
(c) Long-Term Incentive Bonus Subaccount................. 8
(d) Transfer Credits Subaccount.......................... 8
(e) Cash Award Payments Subaccount....................... 9
(f) Adjustments to Subaccounts........................... 9
4.3 Vesting of a Participant's Account......................... 9
SECTION 5. BENEFITS................................................... 9
5.1 Distribution of Participant's Account...................... 9
(a) Distribution at End of Deferral Period or
Upon Severance....................................... 9
(b) Distribution Upon Retirement......................... 9
(c) Election of Optional Distribution Forms.............. 10
(d) Election of Optional Distribution Dates.............. 10
5.2 Withdrawals................................................ 11
(a) Manner of Making Withdrawals......................... 11
(b) Substantial Penalty.................................. 11
(c) Limitations on Withdrawals........................... 11
5.3 Death Benefits............................................. 11
5.4 Acceleration of Distributions.............................. 12
SECTION 6. BENEFITS UNFUNDED.......................................... 12
6.1 Benefits Unfunded.......................................... 12
6.2 Grantor Trust.............................................. 12
SECTION 7. THE ADMINISTRATOR.......................................... 13
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.1 Members.................................................... 13
7.2 Action..................................................... 13
7.3 Right and Duties........................................... 13
7.4 Compensation, Indemnity and Liability...................... 14
7.5 Taxes...................................................... 14
SECTION 8. CLAIMS PROCEDURE........................................... 14
8.1 Claims for Benefits........................................ 14
8.2 Appeals.................................................... 15
SECTION 9. AMENDMENT AND TERMINATION.................................. 15
9.1 Amendments................................................. 15
9.2 Discontinuance of Plan..................................... 15
SECTION 10. MISCELLANEOUS.............................................. 16
10.1 Limitation on Participant's Rights......................... 16
10.2 Other Plans................................................ 16
10.3 Receipt, Release or Setoff................................. 16
10.4 Governing Law.............................................. 16
10.5 Gender, Tense, and Headings................................ 16
10.6 Successors and Assigns..................................... 16
</TABLE>
-iii-
<PAGE>
MATTEL, INC.
DEFERRED COMPENSATION PLAN
SECTION 1. GENERAL
1.1 Purpose. Mattel, Inc., a Delaware corporation, hereby amends
-------
and restates the deferred compensation plan set forth below to provide
Participants with a vehicle to implement financial planning strategies for the
future by allowing for deferral of all or a portion of their Compensation and
providing benefits for their retirement. This Plan and the related Enrollment
Form are intended to be an unfunded arrangement maintained by the Company
primarily for the purpose of providing deferred compensation for a select group
of management or highly compensated employees within the meaning of Sections
201, 301 and 401 of ERISA.
1.2 Enrollment Form. The specifications of this Plan that apply to
---------------
any Participant are contained in a separate Enrollment Form executed by the
Company and the Participant. The Enrollment Form constitutes a part of this
Plan and its terms are incorporated into the Plan.
SECTION 2. DEFINITIONS
2.1 Account. The record maintained by the Administrator to
-------
determine each Participant's interest under this Plan. Such Account may be
divided into subaccounts and shall be reflected as a book reserve entry in the
Company's accounting records.
2.2 Administrator. The person, persons or entity appointed by the
-------------
Board of Directors pursuant to Article 7 to manage and administer the Plan.
2.3 Beneficiary. The person or persons (natural or otherwise)
-----------
designated by a Participant in accordance with Section 5.3 to receive any
undistributed benefits under the Plan at the time of the Participant's death.
2.4 Board of Directors. The Board of Directors of the Company or
------------------
the Compensation and Options Committee of the Board of Directors.
2.5 Change in Control. A "Change in Control" shall be deemed to
-----------------
have occurred on:
(a) The "Distribution Date" as that term is defined in Section
1(h) of the Company's Rights Agreement dated February 7, 1992, as it may be
amended from time to time. The definition of "Distribution Date" contained in
the Company's Rights Agreement shall continue to apply, notwithstanding the
expiration or termination of that agreement; or
<PAGE>
(b) The date (during any period of two consecutive calendar
years) that individuals who at the beginning of such period constituted the
Company's Board of Directors cease for any reason (other than natural causes,
including death, disability or retirement) to constitute a majority thereof; or
(c) The date the stockholders of the Company approve:
(1) A plan of complete liquidation of the Company;
(2) An agreement for the sale or disposition of all or
substantially all of the assets of the Company; or
(3) A merger, consolidation, or reorganization of the
Company with or involving any other corporation, other than a merger,
consolidation, or reorganization that would result in the voting stock of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting stock of the surviving
entity) at least eighty percent (80%) of the combined voting power of the stock
that is outstanding immediately after the merger, consolidation, or
reorganization, unless the Board of Directors of the Company determines by a
majority vote prior to the merger, consolidation, or reorganization that no
Change in Control will occur as a result of such transaction; or
(d) The date a "Change in Control" occurs within the meaning
of the term defined in the grantor trust agreement established under Section 6.2
hereof.
2.6 Code. The Internal Revenue Code of 1986, as amended from time
----
to time, or any successor statute.
2.7 Combined Voting Power. The aggregate votes entitled to be cast
---------------------
generally in the election of directors of a corporation by holders of then
outstanding Voting Securities of such corporation.
2.8 Company. Mattel, Inc., a Delaware corporation.
-------
2.9 Company Matching Credits. The amount credited to the
------------------------
Participant's PIP Excess Plan Account by the Company pursuant to Section 4.2(c)
of the PIP Excess Plan, based on the amount of the Participant's elective
deferrals designated in an Enrollment Form under this Plan that are treated as
deferrals subject to the terms and conditions of the PIP Excess Plan.
2.10 Compensation. Four categories of compensation are included as
------------
Compensation for purposes of the Plan: Base Salary, Short-Term Incentive Bonus,
Long-Term Incentive Bonus and Cash Award Payments. Base Salary is the gross
amount of a Participant's base salary that is regularly scheduled to be paid to
the Participant at specified
-2-
<PAGE>
intervals during any Plan Year, including amounts attributable to Base Salary
deferred to this Plan, the Personal Investment Plan, or the PIP Excess Plan
that, absent the election to defer, would have been payable to the Participant
during such Plan Year and including salary reduction amounts excluded from
income under Section 125 of the Code. Base Salary shall also include short-term
disability payments from the Company until the earlier of a Participant's
qualification for long-term disability benefits, Severance, or the end of the
six-month period after the Participant's Disability commences. Short-Term
Incentive Bonus is the amount subject to payment under the terms of the
Company's Management Incentive Plan and Long-Term Incentive Bonus is the amount
subject to payment under the terms of the Company's Long-Term Incentive Plan.
Cash Award Payments are the amount of any compensation payment or award
(hereinafter referred to as an "Award") that is authorized or approved by action
of the Compensation and Options Committee of the Board of Directors for payment
to an individual who is eligible to participate in the Plan, which Award
specifically provides for an election to defer all or part of such Award under
the Terms of the Plan, the Predecessor Plan or the Mattel Executive Deferred
Compensation Plan. Base Salary, Short-Term Incentive Bonuses, Long-Term
Incentive Bonuses and Cash Award Payments are all included in the definition of
Compensation eligible to be deferred under this Plan.
2.11 Deferrals. The amount credited to the Participant's Account
---------
under this Plan to reflect his interest in the Plan attributable to his elective
deferrals of Compensation.
2.12 Disability. Unless otherwise defined in a disability plan or
----------
insurance policy sponsored by the Company and covering the Participant, the
inability of the Participant to perform his usual duties for the Company for an
extended period by reason of mental or physical illness or injury. The
Administrator may rely on the payment of benefits under any such disability plan
or insurance policy as a determination of the Participant's Disability for
purposes of this Plan. If the Participant is not covered by any such disability
plan or insurance policy, the Administrator shall determine the Participant's
Disability after receiving competent medical advice using nondiscriminatory
standards.
2.13 Effective Date. The Effective Date of this Plan shall be
--------------
January 1, 1994. The Effective Date of this amendment and restatement shall be
the date of execution specified at the end hereof.
2.14 Enrollment Form. The form executed by the Company and the
---------------
Participant which sets forth the Participant's Deferral elections and other
specifications of this Plan applicable to the Participant.
2.15 ERISA. The Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, or any successor statute.
2.16 Exchange Act. The Securities Exchange Act of 1934, as amended
------------
from time to time, or any successor statute.
-3-
<PAGE>
2.17 Independent Plan Administrator. A person, persons or entity
------------------------------
which, prior to a Change in Control has accepted in writing the position of
Independent Plan Administrator under the grantor trust agreement established
under Section 6.2 hereof. The appointment of the Independent Plan Administrator
shall be determined under the provisions of the grantor trust agreement
established under Section 6.2 hereof.
2.18 Investment Funds. The mutual funds, insurance policies,
----------------
investment indexes or other measures of performance identified by the
Administrator which shall be used to determine the return increments to be
credited to each Participant's Account. The Investment Funds may be changed by
the Plan Administrator, in its sole discretion, from time to time.
2.19 Late Retirement Date. A Severance after the Normal Retirement
--------------------
Date.
2.20 Normal Retirement Date. The later of the date upon which a
----------------------
Participant attains age 55 and completes five Years of Service.
2.21 Participant. A key management or highly compensated employee
-----------
of the Company or any participating affiliate that is a participating Company as
defined under the Personal Investment Plan who is employed as a Vice-President
or higher employee classification who completes an Enrollment Form and has not
received a complete distribution of the amounts credited to his Account.
2.22 Person. Any individual, entity (including, without limitation,
------
any corporation, partnership, trust, joint venture, association or governmental
body) or group (as defined in (S) 14(d)(3) or (S) 15(d)(2) of the Exchange Act
and the rules and regulations thereunder); provided, however, that Person shall
not include the Company, any of its subsidiaries, or any employee benefit plan
of the Company or any of its majority-owned subsidiaries or any entity
organized, appointed or established by the Company or such subsidiary for or
pursuant to the terms of any such plan.
2.23 Personal Investment Plan. The Mattel, Inc. Personal Investment
------------------------
Plan, as amended from time to time. The Personal Investment Plan is a separate
tax-qualified retirement plan and trust with a cash or deferred feature that
satisfies the requirements of Code Sections 401(a), 401(k) and 501(a).
2.24 PIP Excess Plan. The Mattel, Inc. PIP Excess Plan, as amended
---------------
from time to time. The PIP Excess Plan is a separate unfunded nonqualified
deferred compensation plan.
2.25 Plan. The Mattel, Inc. Deferred Compensation Plan as described
----
herein and in the Enrollment Form entered into between the Company and the
Participant designated therein, as such Plan and Enrollment Form may hereafter
be amended.
-4-
<PAGE>
2.26 Plan Year. The period with respect to which the records of the
---------
Plan are maintained which shall be the twelve consecutive month period ending
December 31.
2.27 Predecessor Plan. The Mattel, Inc. Personal Investment Plan
----------------
Restoration Plan/Executive Deferred Compensation Plan, an unfunded,
nonqualified, deferred compensation plan maintained by the Company prior to the
Effective Date of this Plan.
2.28 Severance. A Participant's voluntary or involuntary
---------
termination of employment with the Company for any reason at any time.
2.29 Transaction. Any merger, consolidation or recapitalization of
-----------
the Company (or, if the capital stock of the Company is affected, any subsidiary
of the Company); or any sale, lease, or other transfer (in one transaction or a
series of transactions contemplated or arranged by any party as a single plan)
of all or substantially all of the assets of the Company.
2.30 Transfer Credits. The amount of deferred compensation credited
----------------
under the Predecessor Plan that is automatically credited to the PIP Excess
Plan, unless prior to the Effective Date, a one-time transitional election is
made to defer such amounts under the terms of this Plan.
2.31 Valuation Date. The last day of each month within the Plan
--------------
Year and such other dates as may be determined by the Administrator for valuing
Participant Accounts.
2.32 Voting Securities. All securities of a corporation having the
-----------------
right under ordinary circumstances to vote in an election of the board of
directors of such corporation.
2.33 Year of Service. A period of service during which the
---------------
Participant is credited with a year of service under the terms of the Personal
Investment Plan.
SECTION 3. PARTICIPATION
3.1 Eligibility. Any management or highly compensated employee
-----------
employed as a Vice-President or higher position classification shall be eligible
to participate upon the execution of an Enrollment Form. For each Plan Year,
the Enrollment Form shall specify the amount of the Participants's Deferral
election. Employees who were participants in the Predecessor Plan also shall be
eligible to participate in this Plan if a transitional election is made prior to
the Effective Date specifying that Transfer Credits are to be credited to the
Participant's Account under this Plan. An eligible employee shall become a
Participant when amounts are credited to his Account.
-5-
<PAGE>
3.2 Deferral Election. Subject to the limitations of Section 3.3
-----------------
hereof, each Participant may elect to defer any amount or percentage of his
Compensation in the manner prescribed by Section 3.3. A separate Deferral
election shall be required for each category of the Participant's Compensation
(Base Salary, Short-Term Incentive Bonus and Long-Term Incentive Bonus) that
would be received (absent the Deferral election) by the Participant during the
Plan Year for which the elections are effective. Any amount of Compensation
deferred hereunder by a Participant shall be allocated to the Participant's
Deferral Subaccount.
3.3 Time and Manner of Election.
---------------------------
(a) Base Salary. When a Participant of the Company first
-----------
becomes eligible to participate in the Plan, he may enter into an Enrollment
Form and make a prospective election to defer Base Salary Compensation at any
time within 30 days after the date on which he becomes eligible. However, such
election must be made prior to the period of service for which the Compensation
subject to the deferral election would otherwise be payable. Any subsequent
deferral election by the Participant must be made not later than 10 days prior
to the beginning of the period of service for which the Base Salary subject to
the deferral election would otherwise be payable. The maximum Deferral election
shall not exceed 90% of Base Salary Compensation. Except as provided in Section
4.2(a), Base Salary Deferral elections made on an Enrollment Form under this
Plan automatically will be credited to the PIP Excess Plan to the extent
required to obtain the maximum Company Matching Credit. Any deferrals that are
automatically credited to the PIP Excess Plan will be subject to the terms and
conditions of the PIP Excess Plan.
(b) Short-Term Incentive Bonuses. A Participant may enter
----------------------------
into an Enrollment Form and elect to defer all or part of any Short-Term
Incentive Bonus. A Short-Term Incentive Bonus Deferral election must be
submitted to the Administrator no later than 10 days prior to the end of the
Plan Year preceding the Plan Year the bonus is required to be paid, or such
earlier date determined by the Plan Administrator.
(c) Long-Term Incentive Bonuses. A Participant may enter into
---------------------------
an Enrollment Form and elect to defer all or part of any Long-Term Incentive
Bonus award. A Long-Term Incentive Bonus Deferral election must be submitted to
the Administrator no later than 10 days prior to the end of the Plan Year
preceding the Plan Year in which any installment of any Long-Term Incentive
Bonus award is required to be paid, or such earlier date determined by the Plan
Administrator.
(d) Cash Award Payments. A Participant may enter into an
-------------------
Enrollment Form and elect to defer all or part of any Cash Award Payments. A
Cash Award Payments Deferral election must be submitted to the Administrator no
later than 10 days prior to the end of the Plan Year preceding the Plan Year in
which any installment of Cash Award Payments is required to be paid, or such
earlier date determined by the Plan Administrator that
-6-
<PAGE>
is prior to the date the Participant would be entitled to payment in the absence
of an election to defer.
(e) Form of Election. An election to defer Compensation must
----------------
be made in writing on an Enrollment Form and must be filed with the Plan
Administrator for each Plan Year. The Enrollment Form must specify the
percentage or dollar amount to be deferred, the period of deferral and the
category of Compensation to be deferred. If an Eligible Employee fails to file
an Enrollment Form with the Plan Administrator by the prescribed time, he will
be deemed to have elected to not defer any Compensation under this Plan. Except
as provided in Section 3.4 of this Plan, a Participant may not, after the
applicable election date specified in (a), (b), (c) or (d) of this Section,
discontinue his election to participate or change the percentage of Compensation
for a Year for which he elects to defer.
3.4 Change of Deferral Election. Unless terminated, as provided
---------------------------
below, the Participant's Deferral election shall continue in effect for the
remainder of the Plan Year for which the Deferral election is made. A
Participant may not increase or decrease his Deferral election for the Plan Year
after the applicable date for making the Deferral elections specified in Section
3.3 (the "applicable date"). However, the Plan Administrator, in its sole
discretion, may provide for a one-time prospective increase or decrease in any
Participant's Base Salary Deferral election for the Plan Year after the
applicable date. A Participant may at any time terminate an election and
discontinue future Deferrals of Compensation under this Plan in any Plan Year by
providing written notice to the Administrator not less than ten days prior to
the start of the next period of service for which Compensation will be payable.
In such event, Compensation earned for services subsequent to such termination
will be paid directly to the Participant and will not be subject to his prior
Deferral election. A Participant who elects to discontinue Deferrals under the
Plan for a Plan Year may not recommence Deferrals under the Plan until the
following Plan Year, at which time a new Enrollment Form must be completed.
3.5 Investment Funds - Election and Change. When a Participant
--------------------------------------
enters into an Election Form to defer Compensation in the manner prescribed by
Section 3.3, the Participant shall specify on the Enrollment Form, in the manner
indicated on the Enrollment Form, the allocation of the Participant's deferred
amounts among the designated Investment Funds. A Participant can elect to
change the Investment Fund allocation of the Participant's Accounts or
subaccounts once each year (including inter-fund transfers of previously
deferred amounts), in the manner and at the time specified by the Administrator;
provided, however, that no part of the amounts previously credited to an
Investment Fund that is a Stock Equivalent Account may be transferred to any
other Investment Fund. Such change, if timely, shall be effective with respect
to amounts deferred for the next period of service for which Compensation will
be payable following the period of service in which such election is received
and thereafter. For purposes of this Section a "Stock Equivalent Account" is an
Investment Fund that is credited with the hypothetical purchase of whole shares
of the Company's common stock, par value $1.00 per share (the "Common Stock").
Any amounts credited or allocated to an Investment Fund that is a Stock
Equivalent Account will be
-7-
<PAGE>
distributed in the form of Common Stock. In no event shall the Company be
required to issue fractional shares in connection with a distribution of a
Participant's Stock Equivalent Account. The value of fractional hypothetical
shares of Common Stock shall be distributed in cash. The Plan Administrator may
determine at any time in its sole discretion that no additional deferred amounts
shall be credited to a Stock Equivalent Account for any Participant. In the
event all Stock Equivalent Accounts are frozen, the Plan Administrator my permit
any affected Participant to change his Investment Fund allocation with respect
to additional deferred amounts.
SECTION 4. ACCOUNTS
4.1 Establishment of Accounts. The Plan Administrator shall open
-------------------------
and maintain an Account for each Participant. Separate records shall be
maintained of each Participant's Base Salary Deferral Subaccount, Short-Term
Incentive Bonus Subaccount, Long-Term Incentive Bonus Subaccount, Cash Award
Payments Subaccount and Transfer Credit Subaccount.
4.2 Accounting for Participant's Interests.
--------------------------------------
(a) Base Salary Deferral Subaccount. Each Participant's Base
-------------------------------
Salary Deferral Subaccount shall be credited with the amounts of Compensation
deferred by the Participant pursuant to the Deferral election specified in his
Enrollment Form. However, amounts of Compensation that the Participant elects to
defer under the Plan will automatically be treated as deferrals that are
credited under and subject to the terms and conditions of the PIP Excess Plan to
the extent required to obtain the maximum Company Matching Credit; provided,
however, that an employee who elects to defer Compensation under the terms of
the Plan may elect on the Enrollment Form that the Compensation deferred under
the Plan, in whole or in part, shall not be treated as deferrals under the PIP
Excess Plan. Deferrals will be credited on the first Valuation Date coincident
with or next following the time such amounts would otherwise be payable to the
Participant. The Base Salary Deferral Subaccount shall also be credited with the
adjustments provided by Section 4.2(f) below.
(b) Short-Term Incentive Bonus Subaccount. On each Valuation
-------------------------------------
Date, the Short-Term Incentive Bonus Subaccount of each Participant shall be
credited with the amount of any Deferrals of Short-Term Incentive Bonus. The
Short-Term Incentive Bonus Subaccount shall also be credited with the
adjustments provided by Section 4.2(f) below.
(c) Long-Term Incentive Bonus Subaccount. On each Valuation
------------------------------------
Date, the Long-Term Incentive Bonus Subaccount of each Participant shall be
credited with the amount of any Deferrals of Long-Term Incentive Bonus. The
Long-Term Incentive Bonus Subaccount shall also be credited with the adjustments
provided by Section 4.2(f) below.
(d) Transfer Credits Subaccount. The Transfer Credits
---------------------------
Subaccount shall be credited with all Transfer Credits attributable to the
amount of any
-8-
<PAGE>
deferred compensation credited under the Predecessor Plan, plus the adjustments
provided by Section 4.2(f) below. Amounts attributable to the Predecessor Plan
shall be treated as Transfer Credits that will become subject to all the terms
and conditions of this Plan, if prior to the Effective Date, a one-time
transitional election is made to defer such amounts under the terms of this Plan
instead of the PIP Excess Plan. Such transitional election shall be made by
executing a form prescribed by the Administrator of the PIP Excess Plan.
(e) Cash Award Payments Subaccount. On each Valuation Date,
------------------------------
the Cash Award Payments Subaccount of each Participant shall be credited with
the amount of any Deferrals of Cash Award Payments. The Cash Award Payments
Subaccount shall also be credited with the adjustments provided by Section
4.2(f) below.
(f) Adjustments to Subaccounts. On each Valuation Date, each
--------------------------
Participant's subaccounts shall be adjusted:
(1) to reflect any gain or loss in the Investment Fund or
Funds in which the Participant's subaccounts are deemed to be invested for the
purpose of determining the returns on the Participant's subaccounts since the
preceding Valuation Date; and
(2) to reflect any deferrals or withdrawals since the
preceding Valuation Date.
4.3 Vesting of a Participant's Account. Except as provided by
----------------------------------
Section 5.2, a Participant's interest in his Account at all times shall be 100%
vested and nonforfeitable.
SECTION 5. BENEFITS
5.1 Distribution of Participant's Account.
-------------------------------------
(a) Distribution at End of Deferral Period or Upon Severance.
--------------------------------------------------------
In the event the deferral period designated on a Participant's Enrollment Form
requires a distribution at a specified time prior to the Participant's
Severance, or if the Participant has a Severance for any reason, including
death, Disability or retirement upon the Participant's Normal Retirement Date or
Late Retirement Date, except as provided in Section 5.1(b), the Plan
Administrator shall pay the Participant the vested amount of his Account under
the Plan. The value of the Participant's Account, as determined as of the
Valuation Date immediately preceding the distribution (as adjusted to reflect
any deferrals or withdrawals since the preceding Valuation Date) shall be paid
by the Company in a lump sum payment no later than March 30 of the Plan Year
following the earlier of the end of the deferral period specified on the
Participant's Enrollment Form (the "scheduled distribution date") or the
Participant's Severance.
-9-
<PAGE>
(b) Distribution Upon Retirement. A Participant who has a
----------------------------
Severance due to retirement upon the Participant's Normal Retirement Date or
Late Retirement Date, shall be entitled to elect a distribution under one of the
following optional forms of distribution:
(1) In a lump sum payment no later than March 30 of the
Plan Year following the Participant's Severance;
(2) In five (5) annual installment payments commencing no
later than March 30 of the Plan Year following the Participant's
Severance; or
(3) In ten (10) annual installment payments commencing no
later than March 30 of the Plan Year following the Participant's
Severance.
For the purpose of determining the amount of any distribution to a Participant,
the value of the Participant's Account or any subaccount therein shall be
determined as of the Valuation Date immediately preceding the distribution (as
adjusted to reflect any deferrals or withdrawals since the preceding Valuation
Date). The amount of any installment distribution shall be determined by
dividing the value of the Participant's Account or any subaccount therein by the
number of remaining installments (including the current installment).
(c) Election of Optional Distribution Forms. The method of
---------------------------------------
retirement distribution under Section 5.1(b) shall be selected by the
Participant on the initial Enrollment Form prescribed by the Administrator. Once
elected, the method of retirement distribution selected by the Participant on
the initial Enrollment Form is irrevocable, except as provided herein. If the
method of retirement distribution selected by the Participant on the initial
Enrollment Form is a lump sum payment described in Section 5.1(b)(1), the
Participant may make a one-time election to change the method of distribution to
an installment method described in Section 5.1(b)(2) or Section 5.1(b)(3). Such
one-time election may be made at any time that is not less than one year prior
to the Participant's Severance due to retirement upon the Participant's Normal
Retirement Date or Late Retirement Date (a "retirement Severance"). An election
made less than one year prior to such retirement Severance shall be void and
shall not have any force or effect. In such event, the Participant's Account
will be distributed as a lump sum payment pursuant to Section 5.1(b)(1). In the
event that a Participant for any reason fails to select a method of distribution
on the initial Enrollment Form, the Participant shall be deemed to have selected
a lump sum payment.
(d) Election of Optional Distribution Dates. Once elected,
---------------------------------------
the timing of distribution to a Participant who selected a Deferral period that
ends prior to the Participant's Severance is irrevocable, except as provided
herein. If the timing of distribution selected by the Participant on the initial
Enrollment Form is a specified period that ends prior to the Participant's
Severance, the Participant may make a one-time election to change the timing of
the distribution to a later date. Such one-time election may be made at any time
that is not less than one year prior to the Participant's scheduled distribution
date. An election
-10-
<PAGE>
made less than one year prior to such scheduled distribution date shall be void
and shall not have any force or effect. In such event, the Participant's Account
will be distributed according to the scheduled distribution date specified on
the initial Enrollment Form or upon his earlier Severance.
5.2 Withdrawals.
-----------
(a) Manner of Making Withdrawals. Upon reasonable notice, a
----------------------------
Participant shall be permitted to withdraw at any time all or a portion of the
amount credited to his Account (less a substantial penalty) by filing a written
request with the Plan Administrator specifying the amount to be withdrawn.
(b) Substantial Penalty. Any withdrawal pursuant to this
-------------------
Section 5.2 shall subject the Participant to a substantial penalty equal to at
least six percent (6%) of the amount of the requested withdrawal. The
Administrator, upon reasonable notice to Participants, may change the penalty
percentage to which withdrawals are subject, provided such penalty shall never
be less than six percent (6%). The amount of any penalty shall be treated as a
forfeiture and shall not be subject to reinstatement. The Company and the
Administrator shall be released from any further liability for the withdrawn
benefit amount and the penalty amount. In addition, a Participant who makes a
withdrawal shall not be eligible to make additional Deferrals or to receive
additional Company credits in this Plan during the Plan Year in which the
withdrawal is made and the next following Plan Year.
(c) Limitations on Withdrawals. The Administrator may
--------------------------
prescribe nondiscriminatory rules and procedures limiting the frequency with
which a Participant may make a withdrawal under the Plan and the minimum amount
a Participant may withdraw on any single occasion.
5.3 Death Benefits. In the event the Participant dies prior to a
--------------
Severance, the Company agrees to pay the amount due under Section 5.1 to the
Participant's designated Beneficiary no later than March 30 of the Plan Year
following the Participant's death. If the Participant dies after Normal
Retirement Date at a time when installment payments have commenced, the
remaining installments will be paid to the Participant's Beneficiary in a lump
sum no later than March 30 of the year following death. For the purpose of
determining the amount of any Death Benefit distribution, the value of the
Participant's Account or any subaccount therein shall be determined as of the
Valuation Date immediately preceding the distribution (as adjusted to reflect
any deferrals or withdrawals since the preceding Valuation Date). Such Death
Benefit shall be payable to the Beneficiary designated by the Participant in a
written Beneficiary designation filed with the Company; or if no designation
shall be in effect at the time of Participant's death or if all designated
Beneficiaries shall have predeceased the Participant, then the Beneficiary shall
be the following (in the priority of the order listed):
(a) The Participant's surviving spouse;
-11-
<PAGE>
(b) The Participant's surviving children, including adopted
children;
(c) The Participant's surviving parents; or
(d) The Participant's estate.
The determination by the Administrator as to which persons, if any, qualify
within the foregoing categories shall be final and conclusive upon all persons.
Written consent of the Participant's spouse is required for the Participant's
initial or subsequent designation of a Beneficiary other than the Participant's
spouse, unless the Participant establishes to the satisfaction of the
Administrator that such written consent cannot be obtained because there is no
spouse, or because the spouse cannot be located. The designation of Beneficiary
and spousal consent shall be made in writing on the Enrollment Form and may be
changed at any time, without regard to the restrictions applicable to the timing
and frequency of Deferral Elections.
5.4 Acceleration of Distributions. The Administrator, in its sole
-----------------------------
discretion, may elect to accelerate payment of any or all Participant Accounts,
without regard to any Participant elections.
SECTION 6. BENEFITS UNFUNDED
6.1 Benefits Unfunded. The benefits provided by this Plan shall be
-----------------
unfunded. All amounts payable under this Plan to the Participant shall be paid
from the general assets of the Company, and nothing contained in this Plan shall
require the Company to set aside or hold in trust any amounts or assets for the
purpose of paying benefits to Participant. This Plan shall create only a
contractual obligation on the part of the Company, and Participant shall have
the status of a general unsecured creditor with respect to the benefit
obligations hereunder or any other obligation of the Company to pay benefits
pursuant hereto. Any funds of the Company available to pay benefits pursuant to
the Plan shall be subject to the claims of general creditors of the Company, and
may be used for any purpose by the Company.
6.2 Grantor Trust. Although the Company is responsible for the
-------------
payment of all benefits under the Plan, the Company may, in its discretion,
contribute funds or assets (including insurance policies on the life of any or
all Participants and securities issued by the Company) to a grantor trust for
the purpose of paying benefits under this Plan. Such trust may be irrevocable,
but assets of the trust shall be subject to the claims of creditors of the
Company or any adopting affiliate. To the extent any benefits provided under
the terms of the Plan are actually paid from the trust, the Company or such
adopting affiliate shall have no further obligation with respect thereto. To
the extent any benefits provided under the terms of the Plan are not paid from
the trust, such benefits shall remain the obligation of and shall be paid
-12-
<PAGE>
by the Company or the adopting affiliate. References to payments by the Company
shall be deemed to include payments by the Company or by an adopting affiliate,
as the context may require. The Participants shall have the status of unsecured
creditors insofar as their legal claim for benefits under the Plan and the
Participants shall have no security interest or preferred claim in or to the
assets of any such grantor trust.
SECTION 7. THE ADMINISTRATOR
7.1 Members. The Administrator shall consist of a committee, an
-------
individual, an entity appointed by the Board of Directors to serve at its
pleasure, or the Company. The Administrator, or any member thereof, shall not
be required to be an employee of the Company. The Administrator may resign by
giving notice, in writing, filed with the Board of Directors. If no
Administrator has been appointed by the Company, or if the person designated as
Administrator by the Company is not serving as such for any reason, the Company
shall be deemed to be the Administrator of the Plan. Notwithstanding the prior
provisions of this Section 7.1, if the Company creates a trust as described in
Section 6.2 hereof, and, if such trust provides for an Independent Plan
Administrator, then, following a Change in Control of the Company, the
Independent Plan Administrator (or any successor Independent Plan Administrator)
under the trust shall serve as Administrator of this Plan, so long as such
entity is serving as Independent Plan Administrator under the trust.
7.2 Action. Action of the Administrator may be taken with or
------
without a meeting; provided, however, that any action shall be taken only upon
the vote or other affirmative expression of a majority of the committee members
qualified to vote with respect to such action. If a member of the committee,
the appointed individual or entity is the Participant subject to the Plan, such
Participant shall not participate in any decision which solely affects the
Participant. The Administrator shall for purposes of administering the Plan
choose a secretary who shall keep minutes of the Administrator's proceedings and
all records and documents pertaining to the administration of this Plan. The
secretary may execute any certificate or any other written direction on behalf
of the Administrator.
7.3 Right and Duties. The Administrator, on behalf of the
----------------
Participants, shall administer the Plan and shall have all powers necessary to
accomplish that purpose, including (but not limited to) the following:
(a) to construe, interpret, and administer this Plan;
(b) to make determinations required by this Plan, and to
maintain records regarding Participants' benefits;
(c) to compute and certify to the Company the amount and kinds
of benefits payable to Participant or Participant's Beneficiaries, and
to determine the time and manner in which such benefits are to be
paid;
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<PAGE>
(d) to authorize all disbursements by the Company pursuant to
this Plan;
(e) to maintain all the necessary records of the administration
of this Plan; and
(f) to make and publish such rules for the regulation of this
Plan as are not inconsistent with the terms hereof.
Any construction, interpretation, determination or application of the Plan
provisions by the Administrator shall be final, conclusive and binding on all
parties. All actions by the Administrator shall be applied in a uniform manner
to similarly situated persons. The Administrator shall have no power to add to,
subtract from or modify the terms of the Plan, or to change or add to any
benefits provided by the Plan, or to waive or fail to apply any requirements of
eligibility for a benefit under the Plan.
7.4 Compensation, Indemnity and Liability. The Administrator shall
-------------------------------------
serve as such without compensation for services hereunder. All expenses of the
Administrator shall be paid by the Company. If the Administrator is a
committee, no member of the committee shall be liable for any act or omission of
any other member of the committee, nor for any act or omission on his own part,
excepting his own willful misconduct or gross negligence. The Company shall
indemnify and hold harmless the Administrator and each member of the committee,
if any, against any and all expenses and liabilities arising out of his
membership on the committee, excepting only expenses and liabilities arising out
of his own willful misconduct or gross negligence. The Company, as a condition
of its indemnification obligation, shall have the right, directly or through its
designated representatives, to assume and control the defense of any action with
respect to which indemnification is required and to consent to the terms of any
settlement.
7.5 Taxes. If the whole or any part of any Participant's benefit
-----
shall become liable for the payment of any estate, inheritance, income,
employment or other tax which the Company is required to pay or withhold, the
Company shall have the full power and authority to withhold and pay such tax out
of any monies or other property in its hand for the benefit of the Participant
whose benefits hereunder are so liable. Prior to making any payment, the
Company may require such releases or other documents from any lawful taxing
authority as it shall deem necessary. To the extent benefits paid hereunder are
wages or compensation, the Company shall be entitled to deduct, withhold and pay
any applicable income or employment taxes from amounts otherwise payable to
Participant hereunder.
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<PAGE>
SECTION 8. CLAIMS PROCEDURE
8.1 Claims for Benefits. If the Participant or Beneficiary
-------------------
(hereunder, "Applicant") does not receive timely payment of any benefits which
Applicant believes are due and payable under the Plan, Applicant may make a
claim for benefits to the Administrator. The claim for benefits must be in
writing and addressed to the Administrator or to the Company. If the claim for
benefits is denied, the Administrator shall notify the Applicant in writing
within 90 days after the Plan Administrator initially received the benefit
claim, unless special circumstances require an extension of time. If such an
extension of time is required, written notice of the extension and the special
circumstances shall be given to the Applicant prior to the termination of the
initial 90-day period. In no event shall such extension exceed a period of 90
days from the end of such initial period. Claims not acted upon within the time
prescribed herein shall be deemed denied for purposes of proceeding to the
review stage. Any notice of a denial of benefits shall advise the Applicant, in
a manner calculated to be understood by the Applicant, of the basis for the
denial, specific reference to pertinent Plan provisions on which the denial is
based, a description of any additional material or information necessary for the
Applicant to perfect his claim and an explanation of why such material or
information is necessary, and the steps which the Applicant must take to have
his claim for benefits reviewed.
8.2 Appeals. Each Applicant whose claim for benefits has been
-------
denied may file a written request for a review of his claim by the
Administrator. The request for review must be filed by the Applicant within 60
days after receipt of the written notice denying the claim. The decision of the
Administrator will be made within 60 days after receipt of a request for review
and shall be communicated in writing to the Applicant. Such written notice
shall set forth the basis for the Administrator's decision. If there are
special circumstances (such as the need to hold a hearing) which require an
extension of time for completing the review, the Administrator's decision shall
be rendered not later than 120 days after receipt of a request for review. If
such an extension of time is required, written notice of the extension and the
special circumstances shall be given to the Applicant prior to the termination
of the initial 60-day period. In no event shall such extension exceed a period
of 60 days from the end of such initial period. The Administrator may designate
a representative to receive, review and decide claims in accordance with Section
8.1 hereof. However, the Administrator will receive, review and decide all
appeals in accordance with this Section 8.2.
SECTION 9. AMENDMENT AND TERMINATION
9.1 Amendments. The Company shall have the right to amend this
----------
Plan in whole or in part from time to time by resolution of the Board of
Directors, and to amend and cancel any amendments; provided, however, that no
action under this Section shall cancel or reduce the amount of the Participant's
previously accrued vested benefits. An amendment shall be in writing and be
adopted by the Board of Directors. The action of the Board of Directors
adopting any amendment may, but is not required to, be evidenced by the
execution
-15-
<PAGE>
of such amendment by a duly authorized officer of the Company. The Participant
shall be bound thereby.
9.2 Discontinuance of Plan. The Company expects to continue this
----------------------
Plan indefinitely, but does not obligate itself to do so. The Company reserves
the right to discontinue and terminate the Plan at any time, for any reason
(including a change, or an impending change, in the tax laws of the United
States or the State of California), by resolution of the Board of Directors. If
the Plan is terminated, the Administrator shall be notified of such action in a
writing executed by a duly authorized officer of the Company, and the Plan shall
be terminated at the time therein set forth. Termination of the Plan shall be
binding on the Participant, but in no event may such termination reduce the
Participant's previously accrued vested benefits. If this Plan is terminated,
the Participant's previously accrued vested benefits shall be paid as soon as
reasonably practicable after the first day of the month following the
termination.
SECTION 10. MISCELLANEOUS
10.1 Limitation on Participant's Rights. This Plan shall not give
----------------------------------
any Participant the right to be retained in the Company's employ or any right or
interest to any assets of the Company other than as herein provided. The
Company reserves the right to terminate the employment of any Participant
without any liability for any claim against the Company except to the extent
provided herein.
10.2 Other Plans. This Plan shall not affect the right of
-----------
Participant to participate in and receive benefits under and in accordance with
the provisions of any other employee benefit plans which are now or hereafter
maintained by the Company, unless the terms of such other employee benefit plan
or plans specifically provide otherwise.
10.3 Receipt, Release or Setoff. Any payment to a Participant in
--------------------------
accordance with the provisions of this Plan shall, to the extent thereof, be in
full satisfaction of all claims against the Administrator and the Company, and
the Administrator may require such Participant, as a condition precedent to such
payment, to execute a receipt and release to such effect. Amounts owed to the
Company by any Participant may be setoff from the benefits distributed under
this Plan, provided the Administrator designates the amount and description of
the setoff amounts and any such setoff shall be treated as a distribution that
satisfies the corresponding distribution obligation under this Plan.
10.4 Governing Law. Except to the extent preempted by ERISA, this
-------------
Plan shall be construed, administered, and governed in all respects in
accordance with the laws of the State of California. If any provisions of this
instrument shall be held by a court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions hereof shall continue to be fully
effective.
-16-
<PAGE>
10.5 Gender, Tense, and Headings. In this Plan, whenever the
---------------------------
context so indicates, the singular or plural number and the masculine, feminine,
or neuter gender shall be deemed to include the other. Headings and subheadings
in this Plan are inserted for convenience of reference only and are not
considered in the construction of the provisions hereof.
10.6 Successors and Assigns. This Plan shall inure to the benefit
----------------------
of, and be binding upon, the parties hereto and their successors and assigns;
provided, however, subject to the provisions of applicable law regarding
domestic relations orders, that the benefits hereunder shall not be assignable
or transferable and, except as provided by Section 7.5, any purported transfer,
assignment, encumbrance, or attachment thereof shall be void and of no effect.
In the event of a dispute involving any individual's right to receive the
benefit hereunder, the Administrator or the Company may enter an interpleader
action. Payment of the benefit to a court of competent jurisdiction with proper
notice to the appropriate parties in dispute shall be in full satisfaction of
all claims against the Administrator and the Company as to the Plan, and shall
be equivalent to a receipt and release pursuant to Section 10.3.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its duly authorized officer.
MATTEL, INC.
Dated: August 17, 1998 By: /s/ Alan Kaye
_________________ __________________________
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<PAGE>
EXHIBIT 10.18
MATTEL, INC.
PIP EXCESS PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. GENERAL.................................................... 1
1.1. Purpose.................................................. 1
1.2. Enrollment Form.......................................... 1
SECTION 2. DEFINITIONS................................................ 1
2.1. Account.................................................. 1
2.2. Administrator............................................ 1
2.3. Applicable Limitations................................... 1
2.4. Beneficiary............................................. 1
2.5. Board of Directors...................................... 1
2.6. Change in Control....................................... 2
2.7. Code.................................................... 2
2.8. Combined Voting Power................................... 2
2.9. Company................................................. 2
2.10. Company Automatic Credits............................... 3
2.11. Company Matching Credits................................ 3
2.12. Compensation............................................ 3
2.13. Deferrals............................................... 3
2.14. Deferred Compensation Plan.............................. 3
2.15. Disability.............................................. 3
2.16. Effective Date.......................................... 3
2.17. Enrollment Form......................................... 3
2.18. ERISA................................................... 3
2.19. Exchange Act............................................ 4
2.20. Independent Plan Administrator.......................... 4
2.21. Investment Funds........................................ 4
2.22. Late Retirement Date.................................... 4
2.23. Normal Retirement Date.................................. 4
2.24. Participant............................................. 4
2.25. Person.................................................. 4
2.26. Personal Investment Plan................................ 4
2.27. Plan.................................................... 4
2.28. Plan Year............................................... 5
2.29. Predecessor Plan........................................ 5
2.30. Severance............................................... 5
2.31. Transaction............................................. 5
2.32. Transfer Credits........................................ 5
2.33. Valuation Date.......................................... 5
2.34. Voting Securities....................................... 5
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
2.35. Year of Service......................................... 5
SECTION 3. PARTICIPATION.............................................. 5
3.1. Eligibility............................................. 5
3.2. Deferral Election....................................... 6
3.3. Time and Manner of Election............................. 6
3.4. Change of Election...................................... 6
3.5. Investment Funds - Election and Change.................. 6
SECTION 4. ACCOUNTS................................................... 7
4.1. Establishment of Accounts............................... 7
4.2. Accounting for Participant's Interests.................. 7
(a) Deferral Subaccount................................ 7
(b) Company Automatic Credits Subaccount............... 7
(c) Company Matching Credits Subaccount................ 8
(d) Transfer Credits Subaccount........................ 8
(e) Adjustments to Subaccounts......................... 9
4.3. Vesting of a Participant's Account...................... 9
SECTION 5. BENEFITS................................................... 9
5.1. Distribution of Participant's Account................... 9
(a) Distribution Upon Severance........................ 9
(b) Distribution Upon Retirement....................... 9
(c) Election of Optional Distribution Forms............ 10
5.2. Withdrawals............................................. 10
(a) Manner of Making Withdrawals....................... 10
(b) Substantial Penalty................................ 10
(c) Limitations on Withdrawals......................... 10
5.3. Death Benefits.......................................... 10
5.4. Acceleration of Distributions........................... 11
SECTION 6. BENEFITS UNFUNDED.......................................... 11
6.1. Benefits Unfunded....................................... 11
6.2. Grantor Trust........................................... 12
SECTION 7. THE ADMINISTRATOR.......................................... 12
7.1. Members................................................. 12
7.2. Action.................................................. 12
7.3. Right and Duties........................................ 12
7.4. Compensation, Indemnity and Liability................... 13
7.5. Taxes................................................... 13
SECTION 8. CLAIMS PROCEDURE........................................... 13
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
8.1. Claims for Benefits..................................... 13
8.2. Appeals................................................. 14
SECTION 9. AMENDMENT AND TERMINATION.................................. 14
9.1. Amendments.............................................. 14
9.2. Discontinuance of Plan.................................. 14
SECTION 10. MISCELLANEOUS............................................. 14
10.1. Limitation on Participant's Rights...................... 14
10.2. Other Plans............................................. 14
10.3. Receipt or Release...................................... 15
10.4. Governing Law........................................... 15
10.5. Gender, Tense, and Headings............................. 15
10.6. Successors and Assigns.................................. 15
</TABLE>
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<PAGE>
MATTEL, INC.
PIP EXCESS PLAN
SECTION 1. GENERAL
1.1 Purpose. Mattel, Inc., a Delaware corporation, hereby adopts
-------
the deferred compensation plan set forth below to provide Participants with a
vehicle to make deferrals and provide benefits for their retirement in excess of
the Applicable Limitations under the Code applicable to the Personal Investment
Plan (as defined below). This Plan and the related Enrollment Form are intended
to be an unfunded arrangement maintained by the Employer primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees within the meaning of Sections 201, 301 and 401 of
ERISA.
1.2 Enrollment Form. The specifications of this Plan that apply to
---------------
any Participant are contained in a separate Enrollment Form executed by the
Company and the Participant. The Enrollment Form constitutes a part of this
Plan and its terms are incorporated into the Plan.
SECTION 2. DEFINITIONS
2.1 Account. The record maintained by the Administrator to
-------
determine each Participant's interest under this Plan. Such Account shall be
reflected as a book reserve entry in the Company's accounting records. Each
Participant's Account shall consist of a Participant Deferral Subaccount, a
Company Automatic Credit Subaccount, a Company Matching Credit Subaccount and a
Transfer Credit Subaccount. Each subaccount may be allocated among designated
Investment Funds offered by the Administrator.
2.2 Administrator. The person, persons or entity appointed by the
-------------
Board of Directors pursuant to Article 7 to manage and administer the Plan.
2.3 Applicable Limitations. The provisions of Code Sections
----------------------
415(c), 401(a)(17), 401(k)(3) and 401(m) that limit the amount of deferrals and
contributions that can be allocated to accounts of participants under the
Personal Investment Plan.
2.4 Beneficiary. The person or persons (natural or otherwise)
-----------
designated by a Participant in accordance with Section 5.3 to receive any
undistributed benefits under the Plan at the time of the Participant's death.
2.5 Board of Directors. The Board of Directors of the Company.
------------------
<PAGE>
2.6 Change in Control. A "Change in Control" shall be deemed to
-----------------
have occurred on:
(a) The "Distribution Date" as that term is defined in Section 1(h)
of the Company's Rights Agreement dated February 7, 1992, as it may be amended
from time to time. The definition of "Distribution Date" contained in the
Company's Rights Agreement shall continue to apply, notwithstanding the
expiration or termination of that agreement; or
(b) The date (during any period of two consecutive calendar years)
that individuals who at the beginning of such period constituted the Company's
Board of Directors cease for any reason (other than natural causes, including
death, disability or retirement) to constitute a majority thereof; or
(c) The date the stockholders of the Company approve:
(1) A plan of complete liquidation of the Company;
(2) An agreement for the sale or disposition of all or
substantially all of the assets of the Company; or
(3) A merger, consolidation, or reorganization of the Company with
or involving any other corporation, other than a merger, consolidation, or
reorganization that would result in the voting stock of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting stock of the surviving entity) at
least eighty percent (80%) of the combined voting power of the stock that is
outstanding immediately after the merger, consolidation, or reorganization,
unless the Board of Directors of the Company determines by a majority vote prior
to the merger, consolidation, or reorganization that no Change in Control will
occur as a result of such transaction; or
(d) The date a "Change in Control" occurs within the meaning of the
term defined in the grantor trust agreement established under Section 6.2
hereof.
2.7 Code. The Internal Revenue Code of 1986, as amended from time
----
to time, or any successor statute.
2.8 Combined Voting Power. The aggregate votes entitled to be cast
---------------------
generally in the election of directors of a corporation by holders of then
outstanding Voting Securities of such corporation.
2.9 Company. Mattel, Inc., a Delaware corporation.
-------
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<PAGE>
2.10 Company Automatic Credits. The amount credited to the
-------------------------
Participant's Account by the Company pursuant to the terms of Section 4.2(b)
without regard to the Participant's Deferrals.
2.11 Company Matching Credits. The amount credited to the
------------------------
Participant's Account by the Company pursuant to Section 4.2(c), based on the
amount of the Participant's Deferrals under this Plan.
2.12 Compensation. The gross amount of a Participant's base salary
------------
that is regularly scheduled to be paid to the Participant at specified intervals
during any Plan Year, including amounts attributable to base salary deferred to
this Plan, the Personal Investment Plan, or the Deferred Compensation Plan that,
absent the election to defer, would have been payable to the Participant during
such Plan Year and including salary reduction amounts excluded from income under
Sections 125 and 129 of the Code. Compensation shall also include short-term
disability payments from the Company until the earlier of a Participant's
qualification for long-term disability benefits, Severance, or the end of the
six-month period after the Participant's Disability commences. Short-term and
long-term incentive bonuses are excluded from the definition of Compensation.
2.13 Deferrals. The amount credited to the Participant's Account to
---------
reflect his interest in the Plan attributable to his elective deferrals of
Compensation.
2.14 Deferred Compensation Plan. The Mattel, Inc. Deferred
--------------------------
Compensation Plan, as amended from time to time. The Deferred Compensation Plan
is a separate unfunded nonqualified deferred compensation plan.
2.15 Disability. Unless otherwise defined in a disability plan or
----------
insurance policy sponsored by the Company and covering the Participant, the
inability of the Participant to perform his usual duties for the Company for an
extended period by reason of mental or physical illness or injury. The
Administrator may rely on the payment of benefits under any such disability plan
or insurance policy as a determination of the Participant's Disability for
purposes of this Plan. If the Participant is not covered by any such disability
plan or insurance policy, the Administrator shall determine the Participant's
Disability after receiving competent medical advice using nondiscriminatory
standards.
2.16 Effective Date. The Effective Date of this Plan shall be
--------------
January 1, 1994.
2.17 Enrollment Form. The form executed by the Company and the
---------------
Participant which sets forth the Participant's Deferral elections and other
specifications of this Plan applicable to the Participant.
2.18 ERISA. The Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, or any successor statute.
-3-
<PAGE>
2.19 Exchange Act. The Securities Exchange Act of 1934, as amended
------------
from time to time, or any successor statute.
2.20 Independent Plan Administrator. A person, persons or entity
------------------------------
which, prior to a Change in Control has accepted in writing the position of
Independent Plan Administrator under the grantor trust agreement established
under Section 6.2 hereof. The appointment of the Independent Plan Administrator
shall be determined under the provisions of the grantor trust agreement
established under Section 6.2 hereof.
2.21 Investment Funds. The mutual funds, insurance policies,
----------------
investment indexes or other measures of performance identified by the
Administrator which shall be used to determine the return increments to be
credited to each Participant's Account. The Investment Funds may be changed by
the Plan Administrator, in its sole discretion, from time to time.
2.22 Late Retirement Date. A Severance after the Normal Retirement
--------------------
Date.
2.23 Normal Retirement Date. The later of the date upon which a
----------------------
Participant attains age 55 and completes five Years of Service.
2.24 Participant. A key management or highly compensated employee
-----------
of the Company or any participating affiliate that is a participating company as
defined under the Personal Investment Plan who is employed as a Vice-President
or higher employee classification who either completes an Enrollment Form or is
credited with allocations to his Account and has not received a complete
distribution of the amounts credited to his Account.
2.25 Person. Any individual, entity (including, without limitation,
------
any corporation, partnership, trust, joint venture, association or governmental
body) or group (as defined in (S) 14(d)(3) or (S) 15(d)(2) of the Exchange Act
and the rules and regulations thereunder); provided, however, that Person shall
not include the Company, any of its subsidiaries, or any employee benefit plan
of the Company or any of its majority-owned subsidiaries or any entity
organized, appointed or established by the Company or such subsidiary for or
pursuant to the terms of any such plan.
2.26 Personal Investment Plan. The Mattel, Inc. Personal Investment
------------------------
Plan, as amended from time to time. The Personal Investment Plan is a separate
tax-qualified retirement plan and trust with a cash or deferred feature that
satisfies the requirements of Code Sections 401(a), 401(k) and 501(a).
2.27 Plan. The Mattel, Inc. PIP Excess Plan as described herein and
----
in the Enrollment Form entered into between the Company and the Participant
designated therein, as such Plan and Enrollment Form may hereafter be amended.
-4-
<PAGE>
2.28 Plan Year. The period with respect to which the records of the
---------
Plan are maintained which shall be the twelve consecutive month period ending
December 31.
2.29 Predecessor Plan. The Mattel, Inc. Personal Investment Plan
----------------
Restoration Plan/Executive Deferred Compensation Plan, an unfunded,
nonqualified, deferred compensation plan maintained by the Company prior to the
Effective Date of this Plan.
2.30 Severance. A Participant's voluntary or involuntary
---------
termination of employment with the Company for any reason at any time.
2.31 Transaction. Any merger, consolidation or recapitalization of
-----------
the Company (or, if the capital stock of the Company is affected, any subsidiary
of the Company); or any sale, lease, or other transfer (in one transaction or a
series of transactions contemplated or arranged by any party as a single plan)
of all or substantially all of the assets of the Company.
2.32 Transfer Credits. The amount of deferred compensation credited
----------------
under the Predecessor Plan that is automatically credited to this Plan, unless
prior to the Effective Date, a one-time transitional election is made to defer
such amounts under the terms of the Deferred Compensation Plan.
2.33 Valuation Date. The last day of each month within the Plan
--------------
Year and such other dates as may be determined by the Administrator for valuing
Participant Accounts.
2.34 Voting Securities. All securities of a corporation having the
-----------------
right under ordinary circumstances to vote in an election of the board of
directors of such corporation.
2.35 Year of Service. A period of service during which the
---------------
Participant is credited with a year of service under the terms of the Personal
Investment Plan.
SECTION 3. PARTICIPATION
3.1 Eligibility. Any management or highly compensated employee
-----------
employed as a Vice-President or higher position classification shall be eligible
to participate upon the execution of an Enrollment Form under this Plan or the
Deferred Compensation Plan. For each Plan Year, the Enrollment Form shall
specify the amount of the Participants's Deferral election. Employees who were
participants in the Predecessor Plan also shall be eligible to participate in
this Plan if Transfer Credits are credited to the Participant's Account under
this Plan. An eligible employee shall become a Participant when amounts are
credited to his Account.
-5-
<PAGE>
3.2 Deferral Election. Each Participant may elect to defer any
-----------------
amount or percentage of his Compensation, up to a maximum of 15% of
Compensation, in the manner prescribed by Section 3.3. The Deferral election
shall apply to each item of Compensation that cannot be deferred to the Personal
Investment Plan because of Applicable Limitations under the Code and that would
be received (absent the Deferral election) by the Participant during the Plan
Year for which the election is effective. Any amount of Compensation deferred
hereunder by a Participant shall be allocated to the Participant's Deferral
Subaccount.
3.3 Time and Manner of Election. When a Participant of the Company
---------------------------
first becomes eligible to participate in the Plan, he may enter into an
Enrollment Form and make a prospective election to defer Compensation at any
time within 30 days after the date on which he becomes eligible. However, such
election must be made prior to the period of service for which the Compensation
subject to the deferral election would otherwise be payable. Any subsequent
deferral election by the Participant must be made not later than 10 days prior
to the beginning of the Plan Year for which the Compensation subject to the
deferral election would otherwise be payable. An election to defer Compensation
must be made in writing on an Enrollment Form and must be filed with the Plan
Administrator. The Enrollment Form must specify the percentage or dollar amount
of Compensation to be deferred. If an Eligible Employee fails to file an
Enrollment Form with the Plan Administrator by the prescribed time, he will be
deemed to have elected to not defer any Compensation under this Plan. Except as
provided in Section 3.4 of this Plan, a Participant may not discontinue his
election to participate or change the percentage of Compensation for a Year for
which he elects to defer after the applicable date for making elections
specified herein.
3.4 Change of Election. Upon written notice to the Administrator
------------------
delivered not less than ten days prior to the beginning of the period of service
in which the Participant's Compensation cannot be deferred to the Personal
Investment Plan because of Applicable Limitations under the Code, a Participant
may increase, decrease, or discontinue his existing Deferral election for the
Plan Year. Absent any such election change, the Participant's existing Deferral
election shall continue in effect for subsequent Plan Years. In addition, a
Participant may at any time terminate an election and discontinue future
Deferrals of Compensation under this Plan in a Plan Year by providing written
notice to the Administrator not less than ten days prior to the start of the
next period of service for which Compensation will be payable. In such event,
Compensation earned for services subsequent to such termination will be paid
directly to the Participant and will not be subject to his prior Deferral
election. A Participant who elects to discontinue Deferrals under the Plan for
a Plan Year may not recommence Deferrals under the Plan until the following Plan
Year, at which time a new Enrollment Form must be completed.
3.5 Investment Funds - Election and Change. When a Participant
--------------------------------------
enters into an Election Form to defer Compensation in the manner prescribed by
Section 3.3, the Participant shall specify on the Enrollment Form, in the manner
indicated on the Enrollment Form, the allocation of the Participant's deferred
amounts among the designated Investment
-6-
<PAGE>
Funds. A Participant can elect to change the Investment Fund allocation of the
Participant's Accounts or subaccounts once each year (including inter-fund
transfers of previously deferred amounts), in the manner and at the time
specified by the Administrator; provided, however, that no part of the amounts
previously credited to an Investment Fund that is a Stock Equivalent Account may
be transferred to any other Investment Fund. Such change, if timely, shall be
effective with respect to amounts deferred for the next period of service for
which Compensation will be payable following the period of service in which such
election is received and thereafter. For purposes of this Section a "Stock
Equivalent Account" is an Investment Fund that is credited with the hypothetical
purchase of whole shares of the Company's common stock, par value $1.00 per
share (the "Common Stock"). Any amounts credited or allocated to an Investment
Fund that is a Stock Equivalent Account will be distributed in the form of
Common Stock. In no event shall the Company be required to issue fractional
shares in connection with a distribution of a Participant's Stock Equivalent
Account. The value of fractional hypothetical shares of Common Stock shall be
distributed in cash. The Plan Administrator may determine at any time in its
sole discretion that no additional deferred amounts shall be credited to a Stock
Equivalent Account for any Participant. In the event all Stock Equivalent
Accounts are frozen, the Plan Administrator my permit any affected Participant
to change his Investment Fund allocation with respect to additional deferred
amounts.
SECTION 4. ACCOUNTS
4.1 Establishment of Accounts. The Plan Administrator shall open
-------------------------
and maintain an Account for each Participant. Separate records shall be
maintained of each Participant's Deferral Subaccount, Company Automatic Credits
Subaccount, Company Matching Credits Subaccount and Transfer Credit Subaccount.
4.2 Accounting for Participant's Interests.
--------------------------------------
(a) Deferral Subaccount. Each Participant's Deferral Subaccount shall
-------------------
be credited with the amounts of Compensation deferred by the Participant
pursuant to the Deferral election specified in his Enrollment Form. In
addition, amounts of Compensation that the Participant elects to defer under the
Deferred Compensation Plan will automatically be treated as Deferrals that are
credited under and subject to the terms and conditions of this Plan to the
extent required to obtain the maximum Company Matching Credit under Section
4.2(c); provided, however, that an employee who elects to defer Compensation
under the terms of the Deferred Compensation Plan may elect, according to the
terms of the Deferred Compensation Plan, that the Compensation deferred under
the Deferred Compensation Plan, in whole or in part, shall not be treated as
Deferrals under this Plan. Deferrals will be credited at the time such amounts
would otherwise be payable to the Participant. The Deferral Subaccount shall
also be credited with the adjustments provided by Section 4.2(e) below.
-7-
<PAGE>
(b) Company Automatic Credits Subaccount. On each Valuation Date, the
------------------------------------
Company Automatic Credits Subaccount of each Participant shall be credited with
the Company Automatic Credit amount. The Company Automatic Credit amount shall
be determined by subtracting the amount of the Company contribution allocated to
the Participant's Company contribution account under the Personal Investment
Plan from the amount determined under the following schedule, according to the
Participant's attained age as of the preceding Valuation Date, as follows:
Participant's Age at Percentage of
Last Valuation Date Compensation
------------------- ------------
20 1/2 but less than 30 years 3%
30 but less than 40 years 4%
40 but less than 45 years 5%
45 but less than 50 years 6%
50 but less than 50 years 7%
55 years and older 8%
The maximum Company Automatic Credit pursuant to this Section 4.2(b) shall be an
amount determined by the schedule above, reduced by Company contributions
allocated to the Participant's Company contribution account under the Personal
Investment Plan. The Company Automatic Credits Subaccount shall also be
credited with the adjustments provided by Section 4.2(e) below.
(c) Company Matching Credits Subaccount. On each Valuation Date, the
-----------------------------------
Company Matching Credits Subaccount of each Participant shall be credited with
the Company Matching Credit amount determined by subtracting the amount of the
Company matching contributions allocated to the Participant's Company matching
account under the Personal Investment Plan from the amount which is the sum of
the amounts in (1) and (2) below:
(1) An amount equal to 100% of Deferrals equal to the first
two percent (2%) of Compensation.
(2) An amount equal to 50% of Deferrals equal to the next
four percent (4%) of Compensation.
The maximum Company Matching Credit pursuant to this Section 4.2(c) shall be an
amount equal to the sum of amounts in (1) and (2) above reduced by the Company
matching contributions allocated to the Participant's Company matching account
under the Personal Investment Plan. The Company Matching Credit Subaccount
shall also be credited with the adjustments provided by Section 4.2(e) below.
-8-
<PAGE>
(d) Transfer Credits Subaccount. The Transfer Credits Subaccount shall
---------------------------
be credited with all Transfer Credits attributable to the amount of any deferred
compensation credited under the Predecessor Plan, plus the adjustments provided
by Section 4.2(e) below. Amounts attributable to the Predecessor Plan shall be
treated as Transfer Credits that will become subject to all the terms and
conditions of this Plan, unless prior to the Effective Date, a one-time
transitional election is made to defer such amounts under the terms of the
Deferred Compensation Plan. Such transitional election shall be made by
executing a form prescribed by the Administrator.
(e) Adjustments to Subaccounts. On each Valuation Date, each
--------------------------
Participant's designated Investment Fund subaccounts shall be increased (or
decreased) by an amount equal to the product of (1) the applicable rate of
return of the designated Investment Funds and (2) the amount in the
Participant's Accounts attributable to each designated Investment Fund
subaccount as of the immediately preceding Valuation Date, reduced by any
distributions therefrom.
4.3 Vesting of a Participant's Account. Except as provided by
----------------------------------
Section 5.2, a Participant's interest in his Account at all times shall be 100%
vested and nonforfeitable.
SECTION 5. BENEFITS
5.1 Distribution of Participant's Account.
-------------------------------------
(a) Distribution Upon Severance. In the event the Participant has a
---------------------------
Severance for any reason, including death, Disability or retirement upon the
Participant's Normal Retirement Date or Late Retirement Date, except as provided
in Section 5.1(b), the Plan Administrator shall pay the Participant the vested
amount of his Account under the Plan. The value of the Participant's Account
shall be paid by the Company in a lump sum payment no later than March 30 of the
Plan Year following the Participant's Severance.
(b) Distribution Upon Retirement. A Participant who has a Severance
----------------------------
due to retirement upon the Participant's Normal Retirement Date or Late
Retirement Date, shall be entitled to elect a distribution under one of the
following optional forms of distribution:
(1) In a lump sum payment no later than March 30 of the
Plan Year following the Participant's Severance;
(2) In five (5) substantially equal annual installment
payments commencing no later than March 30 of the Plan Year following the
Participant's Severance; or
-9-
<PAGE>
(3) In ten (10) substantially equal annual installment
payments commencing no later than March 30 of the Plan Year following the
Participant's Severance.
(c) Election of Optional Distribution Forms. The method of retirement
---------------------------------------
distribution under Section 5.1(b) shall be selected by the Participant on the
initial Enrollment Form prescribed by the Administrator. Once elected, the
method of retirement distribution selected by the Participant on the initial
Enrollment Form is irrevocable, except as provided herein. If the method of
retirement distribution selected by the Participant on the initial Enrollment
Form is a lump sum payment described in Section 5.1(b)(1), the Participant may
make a one-time election to change the method of distribution to an installment
method described in Section 5.1(b)(2) or Section 5.1(b)(3). Such one-time
election may be made at any time that is not less than one year prior to the
Participant's Severance due to retirement upon the Participant's Normal
Retirement Date or Late Retirement Date (a "retirement Severance"). An election
made less than one year prior to such retirement Severance shall be void and
shall not have any force or effect. In such event, the Participant's Account
will be distributed as a lump sum payment pursuant to Section 5.1(b)(1). In the
event that a Participant for any reason fails to select a method of distribution
on the initial Enrollment Form, the Participant shall be deemed to have selected
a lump sum payment.
5.2 Withdrawals.
-----------
(a) Manner of Making Withdrawals. Upon reasonable notice, a
----------------------------
Participant shall be permitted to withdraw at any time all or a portion of the
amount credited to his Account (less a substantial penalty) by filing a written
request with the Plan Administrator specifying the amount to be withdrawn.
(b) Substantial Penalty. Any withdrawal pursuant to this Section 5.2
-------------------
shall subject the Participant to a substantial penalty equal to at least six
percent (6%) of the amount of the requested withdrawal. The Administrator, upon
reasonable notice to Participants, may change the penalty percentage to which
withdrawals are subject, provided such penalty shall never be less than six
percent (6%). The amount of any penalty shall be treated as a forfeiture and
shall not be subject to reinstatement. The Company and the Administrator shall
be released from any further liability for the withdrawn benefit amount and the
penalty amount. In addition, a Participant who makes a withdrawal shall not be
eligible to make additional Deferrals or to receive additional Company credits
in this Plan during the Plan Year in which the withdrawal is made and the next
following Plan Year.
(c) Limitations on Withdrawals. The Administrator may prescribe
--------------------------
nondiscriminatory rules and procedures limiting the frequency with which a
Participant may make a withdrawal under the Plan and the minimum amount a
Participant may withdraw on any single occasion.
5.3 Death Benefits. In the event the Participant dies prior to a
--------------
Severance, the Company agrees to pay the amount due under Section 5.1 to the
Participant's designated
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<PAGE>
Beneficiary no later than March 30 of the Plan Year following the Participant's
death. If the Participant dies after Normal Retirement Date at a time when
installment payments have commenced, the remaining installments will be paid to
the Participant's Beneficiary in a lump sum no later than March 30 of the year
following death. Such Death Benefit shall be payable to the Beneficiary
designated by the Participant in a written Beneficiary designation filed with
the Company; or if no designation shall be in effect at the time of
Participant's death or if all designated Beneficiaries shall have predeceased
the Participant, then the Beneficiary shall be the following (in the priority of
the order listed):
(a) The Participant's surviving spouse;
(b) The Participant's surviving children, including adopted
children;
(c) The Participant's surviving parents; or
(d) The Participant's estate.
The determination by the Administrator as to which persons, if any, qualify
within the foregoing categories shall be final and conclusive upon all persons.
Written consent of the Participant's spouse is required for the Participant's
initial or subsequent designation of a Beneficiary other than the Participant's
spouse, unless the Participant establishes to the satisfaction of the
Administrator that such written consent cannot be obtained because there is no
spouse, or because the spouse cannot be located. The designation of Beneficiary
and spousal consent shall be made in writing on the Enrollment Form and may be
changed at any time, without regard to the restrictions applicable to the timing
and frequency of Deferral Elections.
5.4 Acceleration of Distributions. If as a result of a failure by
-----------------------------
the Company to satisfy the terms of any covenant in one or more of its bank loan
agreements, any lender exercises a right to accelerate any bank loan outstanding
to the Company, the Administrator, in its sole discretion, may elect to
accelerate payment of any or all Participant Accounts, without regard to any
Participant elections.
SECTION 6. BENEFITS UNFUNDED
6.1 Benefits Unfunded. The benefits provided by this Plan shall be
-----------------
unfunded. All amounts payable under this Plan to the Participant shall be paid
from the general assets of the Company, and nothing contained in this Plan shall
require the Company to set aside or hold in trust any amounts or assets for the
purpose of paying benefits to Participant. This Plan shall create only a
contractual obligation on the part of the Company, and Participant shall have
the status of a general unsecured creditor with respect to the benefit
obligations hereunder or any other obligation of the Company to pay benefits
pursuant hereto. Any funds of the Company available to pay benefits pursuant to
the Plan shall be subject to the
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<PAGE>
claims of general creditors of the Company, and may be used for any purpose by
the Company.
6.2 Grantor Trust. Although the Company is responsible for the
-------------
payment of all benefits under the Plan, the Company may, in its discretion,
contribute funds or assets (including insurance policies on the life of any or
all Participants and securities issued by the Company) to a grantor trust for
the purpose of paying benefits under this Plan. Such trust may be irrevocable,
but assets of the trust shall be subject to the claims of creditors of the
Company or any adopting affiliate. To the extent any benefits provided under
the terms of the Plan are actually paid from the trust, the Company or such
adopting affiliate shall have no further obligation with respect thereto. To
the extent any benefits provided under the terms of the Plan are not paid from
the trust, such benefits shall remain the obligation of and shall be paid by the
Company or the adopting affiliate. References to payments by the Company shall
be deemed to include payments by the Company or by an adopting affiliate, as the
context may require. The Participants shall have the status of unsecured
creditors insofar as their legal claim for benefits under the Plan and the
Participants shall have no security interest or preferred claim in or to the
assets of any such grantor trust.
SECTION 7. THE ADMINISTRATOR
7.1 Members. The Administrator shall consist of a committee, an
-------
individual, an entity appointed by the Board of Directors to serve at its
pleasure, or the Company. The Administrator, or any member thereof, shall not
be required to be employees of the Company. The Administrator may resign by
giving notice, in writing, filed with the Board of Directors. If no
Administrator has been appointed by the Company, or if the person designated as
Administrator by the Company is not serving as such for any reason, the Company
shall be deemed to be the Administrator of the Plan.
7.2 Action. Action of the Administrator may be taken with or
------
without a meeting; provided, however, that any action shall be taken only upon
the vote or other affirmative expression of a majority of the committee members
qualified to vote with respect to such action. If a member of the committee,
the appointed individual or entity is the Participant subject to the Plan, such
Participant shall not participate in any decision which solely affects the
Participant. The Administrator shall for purposes of administering the Plan
choose a secretary who shall keep minutes of the Administrator's proceedings and
all records and documents pertaining to the administration of this Plan. The
secretary may execute any certificate or any other written direction on behalf
of the Administrator.
7.3 Right and Duties. The Administrator, on behalf of the
----------------
Participants, shall administer the Plan and shall have all powers necessary to
accomplish that purpose, including (but not limited to) the following:
(a) to construe, interpret, and administer this Plan;
-12-
<PAGE>
(b) to make determinations required by this Plan, and to
maintain records regarding Participants' benefits;
(c) to compute and certify to the Company the amount and kinds
of benefits payable to Participant or Participant's Beneficiaries, and
to determine the time and manner in which such benefits are to be
paid;
(d) to authorize all disbursements by the Company pursuant to
this Plan;
(e) to maintain all the necessary records of the administration
of this Plan; and
(f) to make and publish such rules for the regulation of this
Plan as are not inconsistent with the terms hereof.
7.4. Compensation, Indemnity and Liability. The Administrator shall
-------------------------------------
serve as such without bond and without compensation for services hereunder. All
expenses of the Administrator shall be paid by the Company. If the
Administrator is a committee, no member of the committee shall be liable for any
act or omission of any other member of the committee, nor for any act or
omission on his own part, excepting his own willful misconduct or gross
negligence. The Company shall indemnify and hold harmless the Administrator and
each member of the committee, if any, against any and all expenses and
liabilities arising out of his membership on the committee, excepting only
expenses and liabilities arising out of his own willful misconduct or gross
negligence.
7.5. Taxes. If the whole or any part of any Participant's benefit
-----
shall become liable for the payment of any estate, inheritance, income,
employment or other tax which the Company is required to pay or withhold, the
Company shall have the full power and authority to withhold and pay such tax out
of any monies or other property in its hand for the benefit of the Participant
whose benefits hereunder are so liable. Prior to making any payment, the
Company may require such releases or other documents from any lawful taxing
authority as it shall deem necessary. To the extent benefits paid hereunder are
wages or compensation, the Company shall be entitled to deduct, withhold and pay
any applicable income or employment taxes from amounts otherwise payable to
Participant hereunder.
SECTION 8. CLAIMS PROCEDURE
8.1. Claims for Benefits. If the Participant or Beneficiary
-------------------
(hereunder, "Applicant") does not receive timely payment of any benefits which
Applicant believes are due and payable under the Plan, Applicant may make a
claim for benefits to the Administrator. The claim for benefits must be in
writing and addressed to the Administrator or to the Company. If the claim for
benefits is denied, the Administrator shall notify the Applicant in writing
within 90 days after the Plan Administrator initially received the benefit
claim. Any
-13-
<PAGE>
notice of a denial of benefits shall advise the Applicant of the basis for the
denial, any additional material or information necessary for the Applicant to
perfect his claim and the steps which the Applicant must take to have his claim
for benefits reviewed.
8.2. Appeals. Each Applicant whose claim for benefits has been
-------
denied may file a written request for a review of his claim by the
Administrator. The request for review must be filed by the Applicant within 60
days after receipt of the written notice denying the claim. The decision of the
Administrator will be made within 60 days after receipt of a request for review
and shall be communicated in writing to the Applicant. Such written notice
shall set forth the basis for the Administrator's decision. If there are
special circumstances (such as the need to hold a hearing) which require an
extension of time for completing the review, the Administrator's decision shall
be rendered not later than 120 days after receipt of a request for review.
SECTION 9. AMENDMENT AND TERMINATION
9.1. Amendments. The Company shall have the right to amend this
----------
Plan in whole or in part from time to time by resolution of the Board of
Directors, and to amend and cancel any amendments; provided, however, that no
action under this Section shall cancel or affect in any way the amount of the
Participant's previously accrued vested benefits. An amendment shall be in
writing and executed by a duly authorized officer of the Company. The
Participant shall be bound thereby.
9.2. Discontinuance of Plan. The Company expects to continue this
----------------------
Plan indefinitely, but does not obligate itself to do so. The Company reserves
the right to discontinue and terminate the Plan at any time, for any reason
(including a change, or an impending change, in the tax laws of the United
States or the State of California), by resolution of the Board of Directors. If
the Plan is terminated, the Administrator shall be notified of such action in a
writing executed by a duly authorized officer of the Company, and the Plan shall
be terminated at the time therein set forth. Termination of the Plan shall be
binding on the Participant, but in no event may such termination cancel or
otherwise affect in any way the Participant's previously accrued vested
benefits. If this Plan is terminated, the Participant's previously accrued
vested benefits shall be paid within 90 days after the first day of the month
following the termination.
SECTION 10. MISCELLANEOUS
10.1. Limitation on Participant's Rights. This Plan shall not give
----------------------------------
Participant the right to be retained in the Company's employ or any right or
interest to any assets of the Company other than as herein provided. The
Company reserves the right to terminate the employment of Participant without
any liability for any claim against the Company except to the extent provided
herein.
-14-
<PAGE>
10.2. Other Plans. This Plan shall not affect the right of
-----------
Participant to participate in and receive benefits under and in accordance with
the provisions of any other employee benefit plans which are now or hereafter
maintained by the Company, unless the terms of such other employee benefit plan
or plans specifically provide otherwise.
10.3. Receipt or Release. Any payment to a Participant in accordance
------------------
with the provisions of this Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Administrator and the Company, and the
Administrator may require such Participant, as a condition precedent to such
payment, to execute a receipt and release to such effect.
10.4. Governing Law. This Plan shall be construed, administered, and
-------------
governed in all respects in accordance with the laws of the State of California.
If any provisions of this instrument shall be held by a court of competent
jurisdiction to be invalid or unenforceable, the remaining provisions hereof
shall continue to be fully effective.
10.5. Gender, Tense, and Headings. In this Plan, whenever the
---------------------------
context so indicates, the singular or plural number and the masculine, feminine,
or neuter gender shall be deemed to include the other. Headings and subheadings
in this Plan are inserted for convenience of reference only and are not
considered in the construction of the provisions hereof.
10.6. Successors and Assigns. This Plan shall inure to the benefit
----------------------
of, and be binding upon, the parties hereto and their successors and assigns;
provided, however, subject to the provisions of applicable law regarding
domestic relations orders, that the benefits hereunder shall not be assignable
or transferable and, except as provided by Section 7.5, any purported transfer,
assignment, encumbrance, or attachment thereof shall be void and of no effect.
In the event of a dispute involving any individual's right to receive the
benefit hereunder, the Administrator or the Company may enter an interpleader
action. Payment of the benefit to a court of competent jurisdiction with proper
notice to the appropriate parties in dispute shall be in full satisfaction of
all claims against the Administrator and the Company as to the Plan, and shall
be equivalent to a receipt and release pursuant to Section 10.3.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its duly authorized officer.
MATTEL, INC.
Dated: August 17, 1998 By: /s/ Alan Kaye
_________________ __________________________
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<PAGE>
EXHIBIT 10.19
PLEASANT COMPANY
RETIREMENT SAVINGS PLAN AND TRUST AGREEMENT
JULY 1, 1995
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. ELIGIBILITY AND PARTICIPATION. . . . . . . . . . . . . . . . . . . . . 23
2.01 ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.02 ELIGIBILITY BREAK IN SERVICE RULES. . . . . . . . . . . . . . . . . . . . . . . . . 24
2.03 EFFECT OF LEAVE OF ABSENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.04 TRANSFER TO ELIGIBLE CLASS OR
REINSTATEMENT OF INELIGIBLE PARTICIPANT. . . . . . . . . . . . . . . . . . . . . . . 26
2.05 DETERMINATION OF ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.06 MANNER OF BECOMING A PARTICIPANT . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.07 OMISSION OF ELIGIBLE EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.08 INCLUSION OF INELIGIBLE EMPLOYEE . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.09 ELECTION NOT TO PARTICIPATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE III. CONTRIBUTIONS AND ALLOCATIONS. . . . . . . . . . . . . . . . . . . . . 28
3.01 CONTRIBUTIONS BY THE EMPLOYER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3.02 PARTICIPANT'S SALARY REDUCTION ELECTION. . . . . . . . . . . . . . . . . . . . . . . 29
3.03 TIME OF PAYMENT OF CONTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.04 ALLOCATION OF CONTRIBUTIONS AND EARNINGS. . . . . . . . . . . . . . . . . . . . . . . 34
3.05 ACTUAL DEFERRAL PERCENTAGE TESTS . . . . . . . . . . . . . . . . . . . . . . . . . . .40
3.06 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS. . . . . . . . . . . . . . . . . . . . 44
3.07 ACTUAL CONTRIBUTION PERCENTAGE TESTS. . . . . . . . . . . . . . . . . . . . . . . . . 46
3.08 ADJUSTMENTS TO ACTUAL CONTRIBUTION PERCENTAGE TESTS. . . . . . . . . . . . . . . . . 49
3.09 MAXIMUM ANNUAL ADDITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
3.10 MULTIPLE PLAN REDUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
3.11 ADJUSTMENT FOR EXCESS ANNUAL ADDITIONS. . . . . . . . . . . . . . . . . . . . . . . . 59
3.12 TERMINATION OF EMPLOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
3.13 RESTORATION OF ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.14 VALUATION OF THE TRUST FUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
3.15 VALUATION OF PARTICIPANT'S ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . .61
3.16 ALLOCATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
3.17 DIRECTED INVESTMENT ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE IV. VESTING...................................................................62
ARTICLE V. DISTRIBUTIONS OF BENEFITS ACCRUED ON AND AFTER
JANUARY 1, 1995...........................................................63
5.01 RETIREMENT.............................................................................63
5.02 DISTRIBUTION UPON DEATH................................................................63
5.03 PROOF OF DEATH.........................................................................65
5.04 DESIGNATION OF BENEFICIARY.............................................................66
5.05 DISTRIBUTION IN THE EVENT OF DISABILITY................................................64
5.06 DISTRIBUTION IN THE EVENT OF TERMINATION OF EMPLOYMENT.................................67
5.07 TIME AND MANNER OF PAYMENT.............................................................68
5.08 TRANSITIONAL RULE......................................................................72
5.09 LIMITATION ON DISTRIBUTION DUE TO QUALIFIED DOMESTIC
RELATIONS ORDER........................................................................72
5.10 WITHDRAWAL FOR SERIOUS FINANCIAL HARDSHIP..............................................72
ARTICLE VI. DISTRIBUTIONS OF BENEFITS ACCRUED PRIOR TO
JANUARY 1, 1995...........................................................74
6.01 RETIREMENT.............................................................................74
6.02 DETERMINATION OF BENEFITS UPON DEATH...................................................75
6.03 DISTRIBUTION OF BENEFITS UPON DEATH....................................................76
6.04 PROOF OF DEATH.........................................................................79
6.05 DETERMINATION OF BENEFITS IN THE EVENT OF
DISABILITY.............................................................................80
6.06 DETERMINATION OF BENEFITS UPON TERMINATION.......................................80
6.07 TIME AND MANNER OF PAYMENT.............................................................80
6.08 TRANSITIONAL RULE......................................................................86
6.09 LIMITATION ON DISTRIBUTION DUE TO QUALIFIED DOMESTIC
RELATIONS ORDER........................................................................87
6.10 WITHDRAWAL FOR SERIOUS FINANCIAL HARDSHIP..............................................87
ARTICLE VII. TOP HEAVY PROVISIONS......................................................89
7.01 TOP HEAVY PLAN REQUIREMENTS............................................................89
7.02 DETERMINATION OF TOP HEAVY STATUS......................................................89
</TABLE>
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<TABLE>
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ARTICLE VIII. TRUST FUND AND TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.01 ESTABLISHMENT AND ACCEPTANCE OF TRUST. . . . . . . . . . . . . . . . . . . . . . . . . 94
8.02 RESPONSIBILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94
8.03 APPOINTMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.04 POWERS OF TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
8.05 SCOPE OF TRUSTEE'S AUTHORITY AND VOTING. . . . . . . . . . . . . . . . . . . . . . . . 99
8.06 PAYMENTS FROM THE TRUST FUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
8.07 COMMINGLED FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
8.08 PAYMENT OF COMPENSATION, EXPENSES, AND TAXES. . . . . . . . . . . . . . . . . . . . . 100
8.09 ACCOUNTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
8.10 COMMUNICATION FROM EMPLOYER AND PLAN
ADMINISTRATOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101
8.11 INSURANCE AND BONDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
8.12 LIABILITY FOR BREACH OF CO-FIDUCIARY. . . . . . . . . . . . . . . . . . . . . . . . . 102
8.13 PROHIBITED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
8.14 DISQUALIFICATION FROM FIDUCIARY SERVICE . . . . . . . . . . . . . . . . . . . . . . . 103
8.15 REMOVAL, RESIGNATION, AND APPOINTMENT OF A SUCCESSOR TRUSTEE. . . . . . . . . . . . . 103
ARTICLE IX. CLAIMS PROCEDURE AND PLAN ADMINISTRATION . . . . . . . . . . . . . . . .104
9.01 DETERMINATION OF ELIGIBILITY AND CLAIM FOR BENEFITS . . . . . . . . . . . . . . . . .104
9.02 REVIEW PROCEDURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
9.03 DESIGNATION OF PLAN ADMINISTRATOR. . . . . . . . . . . . . . . . . . . . . . . . . . .106
9.04 RESIGNATION AND REMOVAL OF PLAN ADMINISTRATOR;
APPOINTMENT OF SUCCESSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106
9.05 ALLOCATION AND DELEGATION OF RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . 107
9.06 DUTIES AND RESPONSIBILITY OF PLAN ADMINISTRATOR . . . . . . . . . . . . . . . . . . . 107
9.07 INVESTMENT ADVISERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
9.08 EXPENSES AND COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111
9.09 INFORMATION FROM EMPLOYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
ARTICLE X. AMENDMENT AND TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . 112
10.01 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
10.02 TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . .113
10.03 MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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ARTICLE XI. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .114
11.01 PARTICIPANTS' RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
11.02 NONALIENATION OF BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
11.03 DELEGATION OF AUTHORITY BY EMPLOYER. . . . . . . . . . . . . . . . . . . . . . . . . 115
11.04 EXERCISE OF DISCRETION BY CORPORATE TRUSTEE. . . . . . . . . . . . . . . . . . . . . .115
11.05 CONTROL OF TRADES OR BUSINESSES BY OWNER-EMPLOYEE. . . . . . . . . . . . . . . . . . .116
11.06 CONSTRUCTION OF AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117
11.07 GENDER, NUMBER, AND HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117
11.08 QUALIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117
11.09 PROHIBITION OF DIVERSION OF FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . .118
11.10 ROLLOVERS AND TRANSFERS FROM QUALIFIED PLANS. . . . . . . . . . . . . . . . . . . . . 119
11.11 PORTABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121
</TABLE>
<PAGE>
PLEASANT COMPANY RETIREMENT SAVINGS PLAN
AND TRUST AGREEMENT
PLEASANT COMPANY, a Wisconsin corporation, hereinafter referred to as
"Employer", hereby amends and restates its 401(K) Profit Sharing Plan heretofore
adopted effective January 1, 1989, with such amendment and restatement effective
January 1, 1995 unless otherwise provided herein.
WITNESSETH:
WHEREAS, the Employer desires to promote in its employees a strong interest
in the successful operation of its business and to provide an opportunity for an
accumulation of funds for their retirement and financial security; and
WHEREAS, to attain that end, the Employer heretofore formulated a 401(k)
Profit Sharing Plan and now desires to amend and restate said 401(k) Profit
Sharing Plan as is more particularly set forth hereafter.
WHEREAS, the amendment and restatement embodied herein has been approved by
the Board of Directors of the Employer.
NOW, THEREFORE, the Employer hereby constitutes, establishes, and adopts
the following Profit Sharing Plan, and the Employer and Trustee agree to the
following provisions:
ARTICLE I.
DEFINITIONS
1.01 "Accrued Benefit" shall mean the value of a Participant's individual
accounts which are derived from Employer contributions and Employee
contributions, if any, to this Plan.
If a portion of the Participant's individual accounts is invested in
separate savings or time instruments or other segregated assets, the value of
that portion is the value
<PAGE>
of those instruments or other segregated assets at the date of distribution less
any applicable liquidation fees or penalties.
If a portion of the Participant's individual accounts is invested in non-
segregated investments, the value of that portion is the balance of that portion
as of the Valuation Date coinciding with or immediately preceding the date of
distribution. However, the value of the individual account shall be increased
to reflect that Participant's share of any contribution made after that
Valuation Date and shall be decreased to reflect any distribution made to the
Participant after that Valuation Date.
1.02 "Aggregation Group" shall mean a Required Aggregation Group or a
Permissive Aggregation Group as defined in Section 7.02(D).
1.03 "Aggregate Account" shall mean, with respect to each Participant,
the value of all accounts maintained on behalf of a Participant, whether
attributable to Employer or Employee contributions, subject to the provisions of
Section 7.02 (Determination of Top-Heavy Status).
1.04 "Agreement" shall mean this instrument and any amendments or
supplements thereto.
1.05 "Alternate Payee" shall mean any spouse, former spouse, child, or
other dependent of a Participant who is recognized by a Domestic Relations Order
as having a right to receive all, or a portion of, the benefits payable under
the Plan with respect to such Participant.
1.06 "Beneficiary" or "Beneficiaries" shall mean the person or persons,
including a trustee or an estate, to whom a deceased Participant's account is
payable as provided in the Plan subject to the provisions of Articles V and VI.
For the purposes of determining whether the Plan is a top heavy Plan, a
beneficiary
2.
<PAGE>
of a deceased Participant shall be considered as a Key Employee if the
Participant was a Key Employee or a Non-Key Employee if the Participant was a
Non-Key Employee.
1.07 "Break in Service" and "One-Year Break in Service" shall mean a Plan
Year during which an Employee has not completed more than five hundred (500)
Hours of Service. An Employee shall not incur a One-Year Break in Service for
the Plan Year in which he or she becomes a Participant, dies, retires or suffers
Total and Permanent Disability. Further, solely for the purpose of determining
whether a Participant has incurred a One-Year Break in Service, Hours of Service
shall be recognized for "authorized leaves of absence" and "maternity and
paternity leaves of absence".
For purposes of this definition, an "authorized leave of
absence" shall mean an unpaid, temporary cessation from active employment with
the Employer pursuant to an established nondiscriminatory policy, whether
occasioned by illness, military service, or any other reason.
For purposes of this definition, a "maternity or paternity leave of
absence" shall mean, for Plan Years beginning after December 31, 1984, an
absence from work for any period by reason of the Employee's pregnancy, birth of
the Employee's child, placement of a child with the Employee in connection with
the adoption of such child, or any absence for the purpose of caring for such
child during a period immediately following such birth or placement. For this
purpose, Hours of Service shall be credited for the computation period in which
the absence from work begins, only if credit therefore is necessary to prevent
the Employee from incurring a One-Year Break in Service, or, in any other case,
in the immediately following computation period. The Hours of Service credited
for a "maternity or paternity leave of absence" shall be those which would
normally have been credited but for such absence, or, in any case in which the
Plan Administrator is unable to determine such hours normally credited, eight
(8) Hours of Service per day. The total Hours of
3.
<PAGE>
Service required to be credited for a "maternity or paternity leave of absence"
shall not exceed five hundred one (501).
For purposes of Section 2.02, the period for calculating a Break in Service
begins on the employment date and each anniversary thereafter.
1.08 "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
1.09 "Compensation" shall mean all of each Participant's compensation as
that term is defined in Code Section 415(c)(3) and Regulation Section 1.414(s)-
1(c)(3). For any self-employed individual covered under the Plan, compensation
will mean earned income. Compensation shall include only that compensation
which is actually paid to the Participant during the applicable period. Except
as provided elsewhere in this Plan, the applicable period shall be the Plan
Year. In all cases, compensation shall include only Compensation paid while a
Participant.
For purposes of this Section, the determination of Compensation shall be
made by:
(a) excluding (even if includible in gross income) reimbursements or
other expense allowances, fringe benefits (cash or noncash), moving
expenses, deferred compensation and welfare benefits.
(b) including amounts which are contributed by the Employer pursuant
to a salary deferral agreement and which are not includable in the gross
income of the Employee under Code Sections 125, 402(e)(3), 402(h), 403(b)
or 457, and Employee contributions described in Code Section 414(h)(2) that
are treated as Employer contributions.
For Plan Years beginning on or after January 1, 1989, the annual
compensation of each Participant taken into account under the Plan for any year
shall not exceed Two Hundred Thousand Dollars ($200,000.00), as adjusted by the
Secretary at the same time and in the same manner as under Code Section 415(d).
In
4.
<PAGE>
determining the compensation of a Participant for purposes of this limitation,
the rules of Code Section 414(q)(6) 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 who have not attained age 19 before the
close of the year. If, as a result of the application of such rules the adjusted
$200,000 limitation is exceeded, then (except for purposes of determining the
portion of compensation up to the integration level if this plan provides for
permitted disparity), the limitation shall be prorated among the affected
individuals in proportion to each such individual's compensation as determined
under this section prior to the application of this limitation.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan Years
beginning on or after January 1, 1994, the annual compensation of each Employee
taken into account under the Plan shall not exceed the OBRA '93 annual
compensation limit. The OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with Code Section 401(a)(17)(B). The cost of living adjustment in effect for a
calendar year applies to any period, not exceeding 12 months, over which
compensation is determined (determination period) beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in this
Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93
annual compensation limit set forth in this provision.
If compensation for any prior determination period is taken into account in
determining an Employee's benefits accruing in the current Plan Year, the
compensation for that prior determination period is subject to the OBRA '93
annual
5.
<PAGE>
compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of the
first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
1.10 "Deferred Compensation" shall mean the amount of a Participant's total
Compensation which has been contributed to the Plan in accordance with the
Participant's deferral election pursuant to Section 3.02 excluding any such
amounts distributed as excess "annual additions" pursuant to Section 3.11.
1.11 "Determination Date" shall mean the last day of the preceding Plan
Year, or in the case of the first Plan Year, the last day of such Plan Year.
1.12 "Early Retirement Date": the Plan does not provide for an early
retirement date.
1.13 "Elective Contribution" shall mean the Employer's contributions to
the Plan of Deferred Compensation excluding any such amounts distributed as
excess "annual additions" pursuant to Section 3.11. In addition, any Employer
Qualified Non-Elective Contribution made pursuant to Section 3.06 shall be
considered an Elective Contribution for purposes of the Plan. Any such
contributions deemed to be Elective Contributions shall be subject to the
requirements of Sections 3.02(B) and (C) and shall further be required to
satisfy the discrimination requirements of Regulation 1.401(k)-1(b)(5), the
provisions of which are specifically incorporated herein by reference.
1.14 "Eligible Employee" shall mean any Employee, other than a Leased
Employee, who has satisfied the provisions of Section 2.01. Notwithstanding the
foregoing, Leased Employees shall be Eligible Employees if exclusion of such
Leased Employees shall cause the Plan to fail to meet any participation or other
qualification requirements pursuant to Code Section 401(a).
6.
<PAGE>
1.15 "Employee" shall mean any person who is employed by the Employer,
including any self-employed individuals and all employees of any employer
aggregated with the Employer under Code Sections 414(b), (c) or (m), and any
individuals required to be considered Employees of any such Employer under Code
Section 414(n) or under regulations under Code Section 414(o). A person who is
an active member of a collective bargaining unit represented by a labor
organization with an agreement which the Secretary of Labor would find to be a
collective bargaining agreement shall be deemed not to be an Employee hereunder
if retirement benefits were the subject of good faith bargaining between the
labor organization and the Employer. A person who is a non-resident alien and
who receives no earned income (within the meaning of Code Section 991(d)(2))
from the Employer which constitutes income from sources within the United States
(within the meaning of Code Section 861(a)(3)).
1.16 "Employee Retirement Income Security Act of 1974" (hereinafter
"ERISA") shall mean the federal legislation of September 2, 1974, all amendments
thereto, and all federal regulations promulgated pursuant thereto.
1.17 "Employer" shall mean PLEASANT COMPANY and any successor who by
merger, consolidation, purchase or otherwise, assumes the obligations of the
Plan. A partnership is considered to be the Employer of each of the partners
and a sole proprietorship to be the Employer of a sole proprietor.
1.18 "Employer Contribution" shall mean the amount contributed by the
Employer each year pursuant to Article III.
1.19 "Employer Contribution Account" shall mean an account established
for a Participant's share of the Employer's contribution pursuant to Article IV.
7.
<PAGE>
1.20 "Entry Date" shall mean the Effective Date and each date thereafter
specified in Section 2.01 as of which an Employee may become a Participant.
1.21 "Excess Aggregate Contributions" shall mean, with respect to any
Plan Year, the excess of the aggregate amount of the Employer matching
contributions made pursuant to Section 3.01(B) and any qualified non-elective
contributions or elective deferrals taken into account pursuant to Section
3.07(C) on behalf of Highly Compensated Participants for such Plan Year, over
the maximum amount of such contributions permitted under the limitations of
Section 3.07(A).
1.22 "Excess Contributions" shall mean, with respect to a Plan Year, the
excess of Elective Contributions made on behalf of Highly Compensated
Participants for the Plan Year over the maximum amount of such contributions
permitted under Section 3.05(A). Excess contributions shall be treated as an
"annual addition" pursuant to Section 3.09.
1.23 "Excess Deferred Compensation" means, with respect to any taxable
year of a Participant, the excess of the aggregate amount of such Participant's
Deferred Compensation and the elective deferrals pursuant to Section 3.02(F)
actually made on behalf of such Participant for such taxable year, over the
dollar limitation provided for in Code Section 402(g), which is incorporated
herein by reference. Excess Deferred Compensation shall be treated as an
"annual addition" pursuant to Section 3.09 when contributed to the Plan unless
distributed to the affected Participant no later than the first April 15th
following the close of the Participant's taxable year. Additionally, for
purposes of Sections 7.02 and 3.04(G), Excess Deferred Compensation shall
continue to be treated as Employer contributions even if distributed pursuant to
Section 3.02(F). However, Excess Deferred Compensation of Non-Highly Compensated
Participants is not taken into account for purposes of Section
8.
<PAGE>
3.05(A) to the extent such Excess Deferred Compensation occurs pursuant to
Section 3.02(D).
1.24 "Family Member" shall mean, with respect to an Employee, such
Employee's spouse and lineal ascendants or descendants and the spouses of such
lineal ascendants or descendants.
1.25 "Fiscal Year" shall mean the twelve (12) month period January 1
through December 31.
1.26 "Forfeiture": the Plan does not provide for forfeitures.
1.27 "Former Participant" shall mean a person who has been a Participant,
but who has ceased to be a Participant for any reason.
1.28 "414(s) Compensation" with respect to any Participant shall mean
such Participant's "415 Compensation" paid during a Plan Year. The amount of
"414(s) compensation with respect to any Participant shall include "414(s)
Compensation" for the entire twelve (12) month period ending on the last day of
such Plan Year, except that "414(s) Compensation" shall only be recognized for
that portion of the Plan Year during which an Employee was a Participant in the
Plan.
For purposes of this Section, the determination of "414(s) Compensation"
shall be made by including amounts which are contributed by the Employer
pursuant to a salary reduction agreement and which are not includible in the
gross income of the Participant under Code Sections 125, 402(e)(3),
402(h)(1)(B), 403(b) or 457, and Employee contributions described in Code
Section 414(h)(2) that are treated as Employer contributions.
"414(s) Compensation" in excess of $200,000 shall be disregarded. Such
amount shall be adjusted at the same time and in such manner as permitted under
Code Section 415(d), except
9.
<PAGE>
that the dollar increase in effect on January 1 of any calendar year shall be
effective for the Plan Year beginning with or within such calendar year and the
first adjustment to the $200,000 limitation shall be effective on January 1,
1990. For any short Plan Year the "414(s) Compensation" limit shall be an amount
equal to the "414(s) Compensation" limit for the calendar year in which the Plan
Year begins multiplied by the ratio obtained by dividing the number of full
months in the short Plan Year by twelve (12). In applying this limitation, the
family group of a Highly Compensated Participant who is subject to the Family
Member aggregation rules of Code Section 414(q)(6) because such Participant is
either a "five percent owner" of the Employer or one of the ten (10) Highly
Compensated Employees paid the greatest "415 Compensation" during the year,
shall be treated as a single Participant, except that for this purpose Family
Members shall include only the affected Participant's spouse and any lineal
descendants who have not attained age nineteen (19) before the close of the
year.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan Years
beginning on or after January 1, 1994, the annual Compensation of each Employee
taken into account under the Plan shall not exceed the OBRA '93 annual
compensation limits. The OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with Code Section 401(a)(17)(B). The cost of living adjustment in effect for a
calendar year applies to any period, not exceeding 12 months, over which
Compensation is determined (determination period) beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
For Plan Years beginning on or after January 1, 1994, any reference in this
Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA '93
annual compensation limit set forth in this provision.
10.
<PAGE>
If Compensation for any prior determination period is taken into account in
determining an Employee's benefits accruing in the current Plan Year, the
Compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period. For
this purpose, for determination periods beginning before the first day of the
first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is $150,000.
If, in connection with the adoption of this amendment and restatement, the
definition of "414(s) Compensation" has been modified, then, for Plan Years
prior to the Plan Year which includes the adoption date of this amendment and
restatement, "414(s) Compensation" means compensation determined pursuant to the
Plan then in effect.
1.29 "415 Compensation" shall mean compensation as defined in Section
3.09(D).
1.30 "Highly Compensated Employee" shall mean Highly Compensated Active
Employees and Highly Compensated Former Employees.
A Highly Compensated Active Employee includes any Employee who performs
services for the Employer during the determination year and who, during the
look-back year: (i) received compensation from the Employer in excess of
Seventy-Five Thousand Dollars ($75,000.00) (as adjusted pursuant to Code Section
415(d)); (ii) received compensation from the Employer in excess of Fifty
Thousand Dollars ($50,000.00) (as adjusted pursuant to Code Section 415(d)) and
was a member of the top-paid group for such year; or (iii) was an officer of the
Employer and received compensation during such year that is greater than fifty
percent (50%) of the dollar limitation in effect under Code Section
415(b)(1)(A). The term Highly Compensated Employee also includes: (i) Employees
who are both described in the preceding sentence if the term "determination
year" is substituted for the
11.
<PAGE>
term "look-back year" and the Employee is one of the one hundred (100) Employees
who received the most compensation from the Employer during the determination
year; and (ii) Employees who are five percent (5%) owners at any time during the
look-back year or determination year.
If no officer has satisfied the compensation requirement of (iii) above
during either a determination year or look-back year, the highest paid officer
for such year shall be treated as a Highly Compensated Employee.
For this purpose, the determination year shall be the Plan Year. The
look-back year shall be the twelve-month period immediately preceding the
determination year.
A Highly Compensated Former Employee includes any Employee who separated
from service (or was deemed to have separated) 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 fifty-fifth (55th)
birthday.
If an Employee is, during a determination year or look-back year, a Family
Member of either a five percent (5%) owner who is an active or former Employee
or a Highly Compensated Employee who is one of the ten (10) most Highly
Compensated Employees ranked on the basis of compensation paid by the Employer
during such year, then the Family Member and the five percent (5%) owner or top-
ten Highly Compensated Employee shall be aggregated. In such case, the Family
Member and the five percent (5%) owner or top-ten Highly Compensated Employee
shall be treated as a single Employee receiving compensation and Plan
contributions or benefits equal to the sum of such compensation and
contributions or benefits of the Family Member and five percent (5%) owner or
top-ten Highly Compensated Employee.
The determination of who is a Highly Compensated Employee, including the
determinations of the number and identity of Employees in the top-paid group,
the top one hundred (100)
12.
<PAGE>
Employees, the number of Employees treated as officers and the compensation that
is considered, will be made in accordance with Code Section 414(q) and
regulations thereunder. The top paid group shall be the top twenty percent (20%)
of employees when ranked on the basis of Compensation during the Plan Year,
excluding those Employees allowed to be excluded under Code Section 414(q)(8).
Compensation shall mean Code Section 415(c)(3) Compensation determined without
regard to Code Sections 125, 402(a)(8), 402(h)(1)(B) and 403(b) as they relate
to salary deferral or salary reduction contributions.
Code Sections 414(b), (c), (m), (n) and (o) shall be applied before the
application of this Section.
1.31 "Highly Compensated Participant" shall mean any Highly Compensated
Employee who is eligible to participate in the Plan.
1.32 "Hour of Service" shall mean each hour (i) for which an Employee is
paid, or entitled to payment, for the performance of duties for the Employer
during the applicable computation period; or (ii) for which an Employee is paid,
or entitled to payment, by the Employer on account of a period of time during
which no duties are performed (irrespective of whether the employment
relationship has terminated) due to vacation, holiday, illness, incapacity
(including disability), lay-off, jury duty, military duty, or leave of absence.
However, non-hourly Employees may be credited with forty-five (45) Hours of
Service per week for weeks in which the Employee would be credited with Hours of
Service for purposes of eligibility, vesting, benefit accrual, or Breaks in
Service. Notwithstanding the preceding sentence, no more than five hundred one
(501) Hours of Service shall be credited under clause (ii) above to an Employee
on account of any single continuous period during which the Employee performs no
duties (whether or not such period occurs in a single computation period).
Hours of Service credited for periods during which the Employee performs no
duties shall be credited in
13.
<PAGE>
accordance with Department of Labor Regulations, Sections 2530.200b-2(b) and
(c). In addition thereto, to the extent an Employee is not otherwise credited
with an Hour of Service in accordance with the provisions of this paragraph, an
Employee shall be entitled to be credited with an Hour of Service in the year
earned, for each hour for which back pay, irrespective of mitigation of damages,
is either awarded or agreed to by the Employer. All questions of interpretation
of "Hour of Service" are to be settled in the Employee's favor.
1.33 "Investment Adviser" shall mean any person or persons,
organization, partnership or corporation appointed as provided in Section 9.07.
The Investment Adviser shall either be registered as an investment adviser under
the Investment Advisers Act of 1940; or it shall be a bank as defined in said
Act; or it shall be an insurance company qualified under the laws of one or more
states to perform services consisting of the management, acquisition or
disposition of any assets of the Plan.
1.34 "Key Employee" shall mean any Participant as defined in Code Section
416(i) and the regulations thereunder. Generally, Key Employee shall mean any
Participant or Former Participant (and each of his or her beneficiaries) who, at
any time during the Plan Year or any of the preceding four (4) Plan Years has
been included in any one of the following categories:
(A) An officer of the Employer (as that term is defined within the meaning
of the regulations under Code Section 416) having "415 Compensation" for the
Plan Year greater than fifty percent (50%) of the amount in effect under Code
Section 415(b)(1)(A) for such Plan Year. Only those Employers which are
incorporated shall be considered as having officers.
(B) One of the ten (10) Employees having annual "415 Compensation" from
the Employer of more than the dollar limitation in effect under Code Section
415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or
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considered as owning within the meaning of Code Section 318) both more than one-
half percent (0.5%) interest and the largest interests in all employers required
to be aggregated under Code Sections 414(b), (c), and (m).
(C) A "five percent owner" of the Employer. "Five percent owner" shall
mean any person who owns (or is considered as owning within the meaning of Code
Section 318) more than five percent (5%) of the outstanding stock of the
Employer or stock possessing more than five percent (5%) of the total combined
voting power of all stock of the Employer, or, in the case of an unincorporated
business, any person who owns more than five percent (5%) of the capital or
profits interest in the Employer. In determining percentage ownership
hereunder, employers that would otherwise be aggregated under Code Sections
414(b), (c) and (m) shall be treated as separate employers.
(D) A "one percent owner" of the Employer having an annual "415
Compensation" as defined in Section 3.09(D) from the Employer of more than One
Hundred Fifty Thousand Dollars ($150,000.00). "One percent owner" shall mean
any person who owns (or is considered as owning within the meaning of Code
Section 318) more than one percent (1%) of the outstanding stock of the Employer
or stock possessing more than one percent (1%) of the total combined voting
power of all stock of the Employer, or, in the case of an unincorporated
business, any person who owns more than one percent (1%) of the capital or
profits of the Employer. In determining percentage ownership hereunder,
employers that would otherwise be aggregated under Code Sections 414(b), (c) and
(m) shall be treated as separate employers. However, in determining whether an
individual has "415 Compensation" of more than One Hundred Fifty Thousand
Dollars ($150,000.00), Compensation from each employer required to be aggregated
under Code Sections 414(b),(c) and (m) shall be taken into account.
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1.35 "Leased Employee" shall mean 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 Code Section
414(n)(6)) on a substantially full time basis for a period of at least one (1)
year, and such services are of a type historically performed by employees in the
business field of the recipient employer. Contributions or benefits provided a
leased employee by the leasing organization which are attributable to services
performed for the recipient employer shall be treated as provided by the
recipient employer.
A leased employee shall not be considered an employee of the recipient if:
(1) such employee is covered by a money purchase pension plan providing: (i) a
nonintegrated employer contribution rate of at least ten percent (10%) of
compensation, as defined in Code Section 415(c)(3), but including amounts
contributed pursuant to a salary reduction agreement which are excludable from
the employee's gross income under Code Sections 125, 402(a)(8), 402(h) or
403(b), (ii) immediate participation, and (iii) full and immediate vesting; and
(2) leased employees do not constitute more than twenty percent (20%) of the
recipient's nonhighly compensated workforce.
1.36 "Limitation Year" shall mean the Plan Year.
1.37 "Non-Elective Contribution" shall mean the Employer's contributions
to the Plan excluding, however, contributions made pursuant to the Participant's
deferral election provided for in Section 3.02 and any Qualified Non-Elective
Contribution.
1.38 "Non-Highly Compensated Employee" shall mean any Employee who is
neither a Highly Compensated Employee or a Family Member.
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1.39 "Non-Highly Compensated Participant" shall mean any Participant who
is neither a Highly Compensated Employee nor a Family Member.
1.40 "Non-Key Employee" shall mean any Employee who is not a Key
Employee.
1.41 "Normal Retirement Age" shall mean age Sixty Five (65). If the
Employer enforces a mandatory retirement age, the Normal Retirement Age is the
lesser of that mandatory age or the age specified in this Section.
1.42 "Normal Retirement Date" shall mean the first day of the calendar
month next following the date the Participant attains Normal Retirement Age.
1.43 "Owner-Employee" shall mean a sole proprietor who owns the entire
interest in the Employer or a partner who owns more than ten percent (10%) of
either the capital interest or the profits interest in the Employer and who
receives income for personal services from the Employer. For purposes of this
Plan, an Owner-Employee shall be considered an Employee.
1.44 "Participant" shall mean any Employee who becomes a Participant in
the Plan in accordance with the provisions of Article II and shall include any
former Employee who is receiving or is eligible to receive benefits under the
Plan.
1.45 "Participant's Account" shall mean the account established and
maintained by the Plan Administrator for each Participant with respect to his or
her total interest in the Plan and Trust resulting from the Employer's Non-
Elective Contributions.
A separate account shall be maintained with respect to that portion of the
Participant's Account attributable to Employer
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matching contributions made pursuant to Section 3.01(B) and Employer
discretionary contributions made pursuant to Section 3.01(C).
1.46 "Participant's Combined Account" shall mean the total aggregate amount
of each Participant's Elective Account and Participant's Account.
1.47 "Participant's Elective Account" shall mean the account established
and maintained by the Plan Administrator for each Participant with respect to
his or her total interest in the Plan and Trust resulting from the Employer's
Elective Contributions. A separate accounting shall be maintained with respect
to that portion of the Participant's Elective Account attributable to Elective
Contributions pursuant to Section 3.02 and any Employer Qualified Non-Elective
Contributions.
1.48 "Plan" shall mean the Plan and Trust Agreement embodied in this
instrument and any amendments or supplements thereto and shall be known as the
PLEASANT COMPANY RETIREMENT SAVINGS PLAN AND TRUST AGREEMENT.
1.49 "Plan Administrator" shall mean the Employer or such other person as
shall be named by the Employer pursuant to Section 9.03 to administer the Plan
on behalf of the Employer. The Plan Administrator shall be responsible for
compliance with the provisions of ERISA.
1.50 "Plan Year" shall mean the twelve (12) consecutive month period
January 1 through December 31.
1.51 "Qualified Non-Elective Contribution" shall mean the Employer's
contributions to the Plan that are made pursuant to Section 3.06. Such
contributions shall be considered an Elective
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Contribution for the purposes of the Plan and used to satisfy the "Actual
Deferral Percentage" tests.
In addition, the Employer's contributions to the Plan that are made
pursuant to Section 3.08(H) which are used to satisfy the "Actual Contribution
Percentage" tests shall be considered Qualified Non-Elective Contributions and
be subject to the provisions of Sections 3.02(B) and 3.02(C).
1.52 "Related Employers" shall mean all employers who are members of a
controlled group of corporations (as defined in Code Section 414(b)), commonly
controlled trades or businesses (as defined in Code Section 414(c)), or
affiliated service groups (as defined in Code Section 414(m)) or other group as
determined pursuant to Code Section 414(o), of which the Employer is a member.
1.53 "Rollover Contribution" shall mean any rollover amount or rollover
contribution as defined in Code Sections 402(a)(5) 403(a)(4) (relating to
certain lump sum distributions from an employer trust or employee annuity plan)
or Code Section 408(d)(3)(A)(ii) (relating to certain distributions from an
individual retirement account or individual retirement annuity). Amounts
transferred directly from another qualified plan or individual retirement
account pursuant to Section 11.10 shall be considered as Rollover Contributions.
1.54 "Self-Employed Individual" shall mean any individual (including
Owner-Employees) who receives earned income from an unincorporated Employer (or
who would have received such but for the fact that the trade or business carried
on by such Employer did not have net profits for the taxable year). For
purposes of the Plan, a Self-Employed Individual shall be considered to be an
Employee.
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1.55 "Shareholder-Employee" shall mean an Employee who owns, or is
considered to own within the meaning of Code Section 318(a)(1), more than five
percent (5%) of the outstanding stock of the Employer where the Employer is a
Subchapter S corporation.
1.56 "Super Top Heavy Plan" shall mean, for Plan Years commencing after
December 31, 1983, that, as of the Determination Date, (i) the present value of
Accrued Benefits of Key Employees, and (ii) the sum of the Aggregate Accounts of
Key Employees under this Plan and all plans of an Aggregation Group, exceeds
ninety percent (90%) of the present value of Accrued Benefits and the Aggregate
Accounts of all Participants under this Plan and any plan of an Aggregation
Group.
1.57 "Taxable Wage Base" or "Maximum Taxable Wage Base" shall mean, with
respect to any taxable year, the maximum amount of earnings which may be
considered wages for such year under Code Section 3121(a)(1), as in effect at
the beginning of the Plan Year.
1.58 "Termination of Employment" shall mean the cessation of an
individual's status as an Employee of the Employer for any reason other than the
death of such Employee. An Employee who does not return to work for the
Employer on or before the expiration of an authorized leave of absence from such
Employer shall be deemed to have incurred a Termination of Employment when such
leave ends.
1.59 "Top Heavy Plan" shall mean, for Plan Years commencing after
December 31, 1983, that, as of the Determination Date, (i) the present value of
Accrued Benefits of Key Employees, and (ii) the sum of the Aggregate Accounts of
Key Employees under this Plan and any plan of an Aggregation Group, exceeds
sixty percent (60%) of the present value of Accrued Benefits and the Aggregate
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Accounts of all Participants under this Plan and any plan of an Aggregation
Group.
1.60 "Top Heavy Plan Year" shall mean any Plan Year commencing after
December 31, 1983, during which the Plan is a Top Heavy Plan.
1.61 "Trust" shall mean the Trust, the terms of which are contained in
this instrument and any amendments or supplements thereto.
1.62 "Trust Fund" or "Fund" shall mean and include all cash, securities,
contracts, and other property, real, personal, or mixed at any time and from
time to time held by the Trustees without distinguishing between principal and
income.
1.63 "Trustee" or "Trustees" shall mean the individual, individuals, or
entity appointed pursuant to Section 8.03 who accepts such appointment in
writing, and any duly appointed successor trustee as provided in Section 8.15.
Trustee shall mean "custodian" in the event the individual or entity named as
Trustee does not have full trust powers.
1.64 "Valuation Date" shall mean the last day of the Plan Year and any
such other date designated by the Plan Administrator which is selected in a
uniform and nondiscriminatory manner when the assets of the Fund are valued at
their then fair market value.
1.65 "Year of Credited Service" shall mean any Plan Year or part thereof,
whether or not the Employee was as yet a Participant under the Plan, in which
the Employee has at least one thousand (1,000) Hours of Service with the
Employer. Years of Credited Service with any corporation, trade or business
which is a member of a controlled group of corporations or under common
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control (as defined by Internal Revenue Code Sections 414(b) and 414(c)) or is a
member of an affiliated service group (as defined by Code Section 414(m)) or
other group as determined pursuant to Code Section 414(o), shall be recognized.
If the plan herein is a plan of a predecessor employer, service for such
predecessor shall be treated as service for the Employer; if the plan herein is
not a plan maintained by a predecessor employer, service for such predecessor
shall be treated as service for the Employer only to the extent required under
treasury regulations.
1.66 "Year of Participation" shall mean any Plan Year in which a
Participant has at least one thousand (1,000) Hours of Service with the
Employer.
1.67 "Year of Service" shall mean the twelve (12) month period during
which the Employee completes not less than one thousand (1,000) Hours of
Service. Such twelve (12) month period shall begin with the date the Employee
commences employment and, in the event that an Employee does not complete one
thousand (1,000) Hours of Service during the initial twelve (12) month period,
computation shall then be made by reference to the first day of the Plan Year
which began after the individual was first employed or any subsequent Plan Year
during which the Employee completes not less than one thousand (1,000) Hours of
Service. A Year of Service for continued eligibility to participate in the Plan
shall be based upon the Plan Year which includes the last day of the eligibility
computation period in which the Employee first completed the service requirement
for participation in the Plan. Years of Service with any corporation, trade or
business which is a member of a controlled group of corporations or under common
control (as defined by Code Sections 414(b) and 414(c)), or is a member of an
affiliated service group (as defined by Code Section 414(m)), or is required to
be aggregated under Code Section 414(o), shall be recognized. If the plan
herein is a plan of a predecessor employer, service for such predecessor
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shall be treated as service for the Employer; if the plan herein is not a plan
maintained by a predecessor employer, service for such predecessor shall be
treated as service for the Employer only to the extent required under treasury
regulations. Years of Service and Breaks in Service will be measured on the same
eligibility computation period.
ARTICLE II.
ELIGIBILITY AND PARTICIPATION
2.01 ELIGIBILITY.
(A) For those employed on or before June 30, 1995. Any Employee shall
---------------------------------------------
become a Participant upon both attaining age 21 and working at least 500 Hours
of Service during the 6-month period following his or her first day of
employment. Any Employee who does not complete 500 Hours of Service during the
6-month period following his or her first day of employment must thereafter
complete 1,000 Hours of Service during a Plan Year, whether such Plan Year be
the one in which the Employee's first 6-month period of employment ends or a
subsequent Plan Year. An Employee shall become a Participant in either case on
the Entry Date first succeeding satisfaction of both the age and service
requirements. The Entry Dates are January 1 and July 1 of each year. Provided,
however, that any Employee normally scheduled to work at least 20 hours per week
who satisfies the age requirement on or before January 1, 1989, and is still
employed on that date, shall become a Participant on January 1, 1989.
(B) For those employed on or after July 1, 1995. Any Eligible Employee
-------------------------------------------
shall be eligible to participate in this Plan after the Employee completes one
(1) Year of Service and has attained the age of twenty-one (21). Any Employee
who becomes eligible to participate in this Plan shall commence participation in
the Plan, if he or she is not separated from the service of the Employer, on the
earlier of the first day of the Plan Year
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beginning after the Employee has satisfied the minimum age and service
requirements of this Section or the first day of the seventh month of such Plan
Year coinciding with or next following the date such Employee met the
eligibility requirements of this section. The entry dates for this Plan are
January 1 and July 1. Temporary absence of the Employee due to vacation,
sickness, medical leave of absence for no longer than twelve (12) months, strike
or seasonal lay-off for less than one (1) year shall not constitute a separation
from the service of the Employer for the purposes of commencing participation.
The foregoing notwithstanding, for purposes of determining the amount and
allocation of the Employer Contributions for any Plan Year, "Compensation" shall
include only Compensation paid while an Employee is a Participant of the Plan,
with the commencement of participation to be as provided in this Section.
(C) Each Employee who was a Participant of the Plan prior to this Amendment
and Restatement shall continue as a Participant of this Plan.
2.02 ELIGIBILITY BREAK IN SERVICE RULES. For purposes of determining an
Employee's eligibility for participation in the Plan, Years of Service with the
Employer shall be taken into account subject to the following provisions:
(A) Plans with Immediate Full Vesting. If an Employee has at least a One-
---------------------------------
Year Break in Service, and if the Employee has not satisfied the length of
service requirement before the break in service, then service before the break
shall not be taken into account.
(B) Vested Participants. If an Employee has at least a One-Year Break in
-------------------
Service, then service before such break shall not be taken into account until
the completion of one (1) Year of Service after such Employee's return.
However, if the length of service requirement is less than one (1) Year of
Service the Employee shall be eligible to participate upon completion of the
length of service requirement after the reemployment date.
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Participation shall be retroactive to the reemployment commencement date.
(C) Non-Vested Employees. If an Employee has at least a One-Year Break in
--------------------
Service and has no vested percentage in such Employee's Accrued Benefit derived
from Employer contributions, or if such Employee was never a Participant in the
Plan, then Years of Service before such break shall not be taken into account if
the number of consecutive One-Year Breaks in Service equals or exceeds the
greater of five (5) years or the aggregate number of Years of Service before the
break. Such aggregate number of Years of Service will not include any Years of
Service disregarded under the preceding sentence by reason of prior Breaks in
Service. If service before such break is required to be taken into account
under this paragraph (C), such service before such break shall not be taken into
account until the completion of one (1) Year of Service after such Employee's
return to employment with the Employer. Participation shall be retroactive to
the reemployment commencement date.
For purposes of applying paragraphs (B) and (C), a Year of Service shall
commence on an Employee's reemployment commencement date and, if necessary,
shall include Plan Years beginning with the Plan Year which includes the first
anniversary of the reemployment commencement date.
2.03 EFFECT OF LEAVE OF ABSENCE. A leave of absence authorized by the
Employer shall not be deemed a Break in Service. An Employee upon such
authorized leave on the last day of the Plan Year shall be considered employed
by the Employer. Any Employee who leaves the actual service of the Employer to
enter the Armed Forces of the United States of America during a period of
national emergency or enters such Armed Forces at any time through the operation
of a compulsory military service law shall be deemed on a leave of absence
authorized by the Employer during the period of his or her service in such Armed
25.
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Forces and during any period after release or discharge from such Armed Forces
while such Employee's reemployment rights are guaranteed by law. In connection
with the company's leave of absence policy, all Employees will be treated alike
in similar circumstances. No period of lay-off shall continue to be an
authorized leave of absence after a period of one (1) year.
2.04 TRANSFER TO ELIGIBLE CLASS OR REINSTATEMENT OF INELIGIBLE
PARTICIPANT. In the event an Employee becomes ineligible to participate under
Section 2.01 because he or she is no longer a member of an eligible class of
Employees, but has not incurred a break in service, such Employee shall
participate immediately upon his or her return to an eligible class of
Employees. If such Employee incurs a break in service, his or her eligibility
to participate shall be determined by Section 2.02.
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 such Employee has satisfied the service requirement
and would have previously become a Participant had he or she been in the
eligible class.
2.05 DETERMINATION OF ELIGIBILITY. The Plan Administrator shall
determine the eligibility of each Employee for participation in the Plan. Such
determination shall be conclusive and binding upon all persons except as
otherwise provided herein or by law.
2.06 MANNER OF BECOMING A PARTICIPANT. The Plan Administrator shall
notify each Employee who becomes eligible to participate under this Plan and
shall furnish any application form, enrollment forms or other documents which
are required of Participants. The Employee shall execute such forms or
documents and make available such information as may be required in the
administration of the Plan. Such Employee must perform all acts
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required within thirty (30) days of the date on which he or she is notified of
his or her eligibility.
All Participants shall be bound by the terms of the Plan, including all
amendments made in the manner authorized herein. Participants shall also be
entitled to all of the rights and privileges afforded under the Plan, including
those specifically granted by ERISA.
2.07 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a
Participant in the Plan is erroneously omitted and discovery of such omission is
not made until after a contribution by the Employer for the year has been made,
the Employer shall make a subsequent contribution with respect to the omitted
Employee in the amount which the said Employer would have contributed with
respect to the Employee had he or she not been omitted. Such contribution shall
be made regardless of whether or not it is deductible in whole or in part in any
taxable year under applicable provisions of the Code.
2.08 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included as
a Participant in the Plan is erroneously included and discovery of such
incorrect inclusion is not made until after a contribution for the year has been
made, the Employer shall not be entitled to recover the contribution made with
respect to the ineligible person regardless of whether or not a deduction is
allowable with respect to such contribution.
2.09 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect
voluntarily not to participate in the Plan. The election not to participate
must be communicated to the Employer, in writing, at least thirty (30) days
before the beginning of a Plan Year.
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ARTICLE III.
CONTRIBUTIONS AND ALLOCATIONS
3.01 CONTRIBUTIONS BY THE EMPLOYER.
For each Plan Year, the Employer shall contribute to the Plan:
(A) The amount of the total salary reduction elections of all
Participants made pursuant to Section 3.02(A), which amount shall be deemed
an Employer's Elective Contribution.
(B) On behalf of each Participant who is eligible to share in matching
contributions for the Plan Year, a discretionary matching contribution
equal to a percentage of each such Participant's Deferred Compensation, the
exact percentage to be determined each year by the Employer, which amount
shall be deemed an Employer' Non-Elective Contribution.
(C) A discretionary amount, which amount shall be deemed an Employer's
Non-Elective Contribution. Subject to the right of the Employer to alter,
amend, or terminate the Plan, the Employer shall make a contribution to the
Trust Fund in an amount to be determined by resolution of the Board of
Directors of the Employer on or before the last day of the Fiscal Year of
the Employer or such other time as may be appropriate. The Employer's
determination of such contribution shall be binding upon all Participants
and the Employer. In the event that the Board of Directors of the Employer
shall not determine that any amount is to be contributed to the Plan, the
Employer shall be under no obligation to make any contribution.
(D) Notwithstanding the foregoing, however, the Employer's
contributions for any Plan Year shall not exceed the maximum amount
allowable as a deduction to the Employer under the provisions of the Code
Section 404. All
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contributions by the Employer shall be made in cash or in such property
as is acceptable to the Trustee.
(E) Except, however, to the extent necessary to provide the top heavy
minimum allocations, the Employer shall make a contribution even if it
exceeds the amount which is deductible under Code Section 404.
3.02 PARTICIPANT'S SALARY REDUCTION ELECTION
(A) Each Participant may elect to defer his or her compensation which
would have been received in the Plan Year, but for the deferral election,
by up to Fifteen Percent (15%). A deferral election (or modification of an
earlier election) may not be made with respect to Compensation which is
currently available on or before the date the Participant executed such
election.
The amount by which Compensation is reduced shall be that
Participant's Deferred Compensation and be treated as an Employer Elective
Contribution and allocated to that Participant's Elective Account.
(B) The balance in each Participant's Elective Account shall be fully
Vested at all times and shall not be subject to Forfeiture for any reason.
(C) Amounts held in the Participant's Elective Account may not be
distributable earlier than:
(1) a Participant's termination of employment, Total and
Permanent Disability, or death;
(2) a Participant's attainment of age 59 1/2;
(3) the termination of the Plan without the establishment or
existence of a "successor plan", as that term is described in
Regulation 1.401(k)-1(d)(3);
(4) the date of disposition by the Employer to an entity that is
not a Related Employer of substantially all of the assets (within the
meaning of Code Section 409(d)(2) used in a trade or business of such
corporation if such corporation continues to maintain
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this Plan after the disposition with respect to a Participant who
continues employment with the corporation acquiring such assets;
(5) the date of disposition by the Employer or a Related Employer
who maintains the Plan of its interest in a subsidiary (within the
meaning of Code Section 409(d)(3)) to an entity which is not a Related
Employer but only with respect to a Participant who continues
employment with such subsidiary; or
(6) the proven financial hardship of a Participant, subject to
the limitations of Sections 5.10 and 6.10.
(D) For each Plan Year beginning after December 31, 1987, a
Participant's Deferred Compensation made under this Plan and all other
plans, contracts or arrangements of the Employer maintaining this Plan
shall not exceed, during any taxable year of the Participant, the
limitation imposed by Code Section 402(g), as in effect at the beginning of
such taxable year. If such dollar limitation is exceeded, a Participant
will be deemed to have notified the Plan Administrator of such excess
amount which shall be distributed in a manner consistent with Section
3.02(F). The dollar limitation shall be adjusted annually pursuant to the
method provided in Code Section 415(d) in accordance with Regulations.
(E) In the event a Participant has received a hardship distribution
from his or her participant's Elective Account pursuant to Sections 5.10 or
6.10 or pursuant to Regulation 1.401(k)-1(d)(2)(iv)(B) from any other plan
maintained by the Employer, then such Participant shall not be permitted to
elect to have Deferred Compensation contributed to the Plan on his or her
behalf for a period of Twelve (12) months following the receipt of the
distribution. Furthermore, the dollar limitation under Code Section 402(g)
shall be reduced, with respect to the Participant's taxable year
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following the taxable year in which the hardship distribution was made, by
the amount of such Participant's Deferred Compensation, if any, pursuant to
the Plan (and any other plan maintained by the Employer) for the taxable
year of the hardship distribution.
(F) If a Participant's Deferred Compensation under this Plan together
with any elective deferrals (as defined in Regulation 1.402(g)-1(b) under
another qualified cash or deferred arrangement (as defined in Code Section
401(k)), a simplified employee pension (as defined in Code Section 408(k)),
a salary reduction arrangement (within the meaning of Code Section
3121(a)(5)(D)), a deferred compensation plan under Code Section 457, or a
trust described in Code Section 501(c)(18) cumulatively exceed the
limitation imposed by Code Section 402(g) (as adjusted annually in
accordance with the method provided in Code Section 415(d) pursuant to
Regulations) for such Participant's taxable year, the Participant may, not
later than March 1 following the close of the Participant's taxable year,
notify the Plan Administrator in writing of such excess and request that
his or her Deferred Compensation under this Plan be reduced by an amount
specified by the Participant. In such event, the Plan Administrator may
direct the Trustee to distribute such excess amount (and any income
allocable to such excess amount) to the Participant no later than the first
April 15th following the close of the Participant's taxable year.
Distributions in accordance with this paragraph may be made for any taxable
year of the Participant which begins after December 31, 1986. Any
distribution of less than the entire amount of Excess Deferred Compensation
and income shall be treated as a pro rata distribution of Excess Deferred
Compensation and income. The amount distributed shall not exceed the
Participant's Deferred Compensation under the Plan for the taxable year.
Any distribution on or before the
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last day of the Participant's taxable year must satisfy each of the
following conditions:
(1) the distribution must be made after the date on which the
Plan received the Excess Deferred Compensation;
(2) the Participant shall designate the distribution as Excess
Deferred Compensation; and
(3) the Plan must designate the distribution as a distribution of
Excess Deferred Compensation.
Any distribution made pursuant to this Section shall be made
simultaneously from Deferred Compensation and matching contributions which
relate to such Deferred Compensation.(G) Notwithstanding Section 3.02(F)
above, a Participant's Excess Deferred Compensation shall be reduced, but
not below zero, by any distribution of Excess Contributions pursuant to
Section 3.06(A) for the Plan Year beginning with or within the taxable year
of the Participant.
(G) At Normal Retirement Date, or such other date when the Participant
shall be entitled to receive benefits, the fair market value of the
Participant's Elective Account shall be used to provide additional benefits
to the Participant or his or her Beneficiary.
(H) All amounts allocated to a Participant's Elective Account may be
treated as a Directed Investment Account pursuant to Section 3.17.
(I) Employer Elective Contributions made pursuant to this Section may
be segregated into a separate account for each Participant in a federally
insured savings account, certificate of deposit in a bank or savings and
loan association, money market certificate, or other short-term debt
security acceptable to the Trustee until such time as the allocations
pursuant to Section 3.04 have been made.
(J) The Employer and the Plan Administrator shall implement the salary
reduction elections provided for herein in accordance with the following:
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(1) A Participant may commence making elective deferrals to the
Plan only after first satisfying the eligibility and participation
requirements specified in Article II. However, the Participant must
make his or her initial salary deferral election within a reasonable
time, not to exceed thirty (30) days, after entering the Plan. If the
Participant fails to make an initial salary deferral election within
such time, then such Participant may thereafter make an election in
accordance with the rules governing modifications. The Participant
shall make such an election by entering into a written salary
reduction agreement with the Employer and filing such agreement with
the Plan Administrator. Such election shall initially be effective
beginning with the pay period following the acceptance of the salary
reduction agreement by the Plan Administrator, shall not have
retroactive effect and shall remain in force until revoked.
(2) A Participant may modify a prior election during the Plan
Year and concurrently make a new election by filing a written notice
with the Plan Administrator within a reasonable time before the pay
period for which such modification is to be effective. However,
modifications to a salary deferral election shall only be permitted
semi-annually, during election periods established by the Plan
Administrator. Any modification shall not have retroactive effect and
shall remain in force until revoked.
(3) A Participant may elect to prospectively revoke his or her
salary reduction agreement in its entirety at any time during the Plan
Year by providing the Plan Administrator with thirty (30) days written
notice of such revocation (or upon such shorter notice period as may
be acceptable to the Plan Administrator). Such revocation shall become
effective as of the
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beginning of the first pay period coincident with or next following
the expiration of the notice period. Furthermore, the termination of
the Participant's employment, or the cessation of participation for
any reason, shall be deemed to revoke any salary reduction agreement
then in effect, effective immediately following the close of the pay
period within which such termination or cessation occurs.
3.03 TIME OF PAYMENT OF CONTRIBUTIONS. The Employer shall pay the
contribution for each Plan Year to the Trustees within the time prescribed by
law, including any extension of time for the filing of a federal income tax
return for such year or within such period as provided by the Internal Revenue
Code of 1986 as amended.
However, Employer Elective Contributions accumulated through payroll
deductions shall be paid to the Trustee as of the earliest date on which such
contributions can reasonably be segregated from the Employer's general assets,
but in any event within ninety (90) days from the date on which such amounts
would otherwise have been payable to the Participant in cash. The provisions of
Department of Labor regulations 2510.3-102 are incorporated herein by reference.
Furthermore, any additional Employer contributions which are allocable to the
Participant's Elective Account for a Plan Year shall be paid to the Plan no
later than the twelve-month period immediately following the close of such Plan
Year.
3.04 ALLOCATION OF CONTRIBUTIONS AND EARNINGS.
(A) The Plan Administrator shall establish and maintain an account in the
name of each Participant to which the Plan Administrator shall credit all
amounts allocated to each such Participant as set forth herein.
(B) The Employer shall provide the Plan Administrator with all information
required by the Plan Administrator to make a
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proper allocation of the Employer's contributions for each Plan Year. Within a
reasonable period of time after the date of receipt by the Plan Administrator of
such information the Plan Administrator shall allocate such contributions as
follows:
(1) With respect to the Employer's Elective Contribution made pursuant
to Section 3.01(A), to each Participant's Elective Account in an amount
equal to each such Participant's Deferred Compensation for the year.
(2) With respect to the Employer's Non-Elective Contribution made
pursuant to Section 3.01(B), to each Participant's Account in accordance
with Section 3.01(B). Only Participants who are actively employed on the
last day of the Plan Year or whose employment terminated because of death
or Total and Permanent Disability or after attainment of Normal Retirement
Age shall be eligible to share in the matching contribution for the year.
(3) With respect to the Employer's Non-Elective Contribution made
pursuant to Section 3.01(C), to each Participant's account as follows:
Step 1: Contributions and forfeitures will be allocated to each
Participant's account in the ratio that each Participant's total
Compensation bears to all Participants' total Compensation, but not in
excess of 3% of each Participant's Compensation.
Step 2: Any contributions and forfeitures remaining after the
allocation in Step 1 will be allocated to each Participant's account in the
ratio that each Participant's Compensation for the Plan Year in excess of
the Integration Level bears to the excess compensation of all Participants,
but not in excess of 3%.
Step 3: Any contributions and forfeitures remaining after the
allocation in Step 2 will be allocated to each Participant's account in the
ratio that the sum of each Participant's total Compensation and
Compensation in excess of the Integration Level bears to the sum of all
Participants' total Compensation and Compensation in excess of the
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Integration Level, but not in excess of the profit sharing maximum
disparity rate.
Step 4: Any remaining Employer contributions or forfeitures will be
allocated to each Participant's account in the ratio that each
Participant's total Compensation for the Plan Year bears to all
Participant's total Compensation for that year.
The Integration Level shall be equal to the taxable wage base. The taxable
wage base is the maximum amount of earnings which may be considered wages for a
year under Section 3121(a)(1) of the Code in effect as of the beginning of the
Plan Year.
The maximum profit sharing disparity rate is equal to the difference
between 3% and the greater of:
(a) 5.7 percentage points; or
(b) the percentage equal to the portion of the Code Section 3111(a)
tax attributable to Old Age Insurance.
Only Participants who have completed a Year of Service and who are actively
employed on the last day of the Plan Year or whose employment terminated because
of death or Total and Permanent Disability or after attainment of Normal
Retirement Age shall be eligible to share in the contribution for the year.
Notwithstanding the foregoing, Participants who have at least 500 Hours of
Service shall receive an allocation if the Plan would otherwise fail to meet the
participation and coverage requirements of Code Sections 401(a)(26) or 410(b) or
any other applicable Code Sections.
(C) For any Top Heavy Plan Year, Non-Key Employees not otherwise eligible
to share in the allocation of contributions as provided above, shall receive the
minimum allocation provided for in Section 3.04(G) if eligible pursuant to the
provisions of Section 3.04(I).
(D) The Trustee at such time as it may deem proper but not less frequently
than upon the last day of each Plan Year shall adjust the balances and the
accounts of all Participants upward or downward pro rata so that the total of
such balances will
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equal the net worth of the Trust Fund as of the last day of each Plan Year.
Directed Investment Accounts, as provided in Section 3.17, shall receive all
income earned and bear all expense or loss incurred, subject to uniform and
nondiscriminatory procedures for determining income or loss of a Directed
Investment Account in a manner which reasonably reflects investment directions
relating to pooled investment and investment directions occurring during a
valuation period. Participant Accounts other than Directed Investment Accounts
shall be increased by Fifty Percent (50%) of the contributions, if any,
allocated during the valuation period and decreased by the amounts, if any,
charged against such accounts during the valuation period for reasonable
administrative costs, insurance premiums, and the cash value of incidental
benefit insurance contracts. The net income, gain or loss since the last
Valuation Date shall then be allocated pro rata to the adjusted Participant
Accounts.
(E) MINIMUM ALLOCATIONS REQUIRED FOR TOP HEAVY PLAN YEARS: Notwithstanding
the foregoing, for any Top Heavy Plan Year, the sum of the Employer
Contributions allocated to the Participant's Account of each Non-Key Employee
shall be equal to at least three percent (3%) of such Non-Key Employee's
Compensation, reduced by contributions allocated to each Non-Key Employee in any
other defined contribution plan included with this plan in a required
Aggregation Group. However, if (i) the sum of the Employer Contributions
allocated to the Participant's Account of each Key Employee for such Top Heavy
Plan Year is less than three percent (3%) of each Key Employee's Compensation,
and (ii) this Plan is not required to be included in an Aggregation Group to
enable a defined benefit plan to meet the requirements of Code Section 401(a)(4)
or 410, the sum of the Employer Contributions allocated to the Participant's
Account of each Non-Key Employee shall be equal to the largest percentage
allocated to the Participant's Account of each Key Employee. Notwithstanding
the foregoing, no minimum allocation shall be required in this Plan for any Non-
Key Employee who participates in another defined contribution plan
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which is included with this Plan in a required Aggregation Group, and which plan
provides minimum allocations pursuant to Code Section 412.
(F) For purposes of the minimum allocations set forth above, the percentage
allocated to the Participant's Account of any Key Employee shall be equal to the
ratio of the sum of the Employer Contributions allocated on behalf of such Key
Employee divided by the "415 Compensation" of such Key Employee as defined in
Section 3.09(D).
(G) For any Top Heavy Plan Year, the minimum allocations set forth above
shall be allocated to the Participant's Account of all Non-Key Employees who are
Participants and who are employed by the Employer on the last day of the Plan
Year, including Non-Key Employees who (1) have failed to complete a Year of
Participation; (2) have declined to make mandatory contributions (if required)
to the Plan; or (3) have been excluded from participation because of their level
of Compensation.
(H) In lieu of the above, in any Plan Year in which a Non-Key Employee is a
Participant in both this Plan and a defined benefit pension plan included in a
Required Aggregation Group which is top heavy, the Employer shall not be
required to provide such Non-Key Employee with both the full separate defined
benefit plan minimum benefit and the full separate defined contribution plan
minimum allocation. Therefore for any Plan Year when the Plan is a Top Heavy
Plan, a Non-Key Employee who is participating in this Plan and a defined benefit
plan maintained by the Employer shall receive a minimum monthly accrued benefit
in the defined benefit plan equal to the product of (1) one-twelfth (1/12th) of
"415 Compensation" averaged over the five (5) consecutive "limitation years" (or
actual "limitation years", if less) which produce the highest average and (2)
the lesser of (i) two percent (2%) multiplied by years of service when the plan
is top heavy or (ii) twenty percent (20%). Further, the extra minimum
allocation required to provide higher limitations shall not be provided.
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(I) Notwithstanding anything herein to the contrary, Participants who
terminated employment for any reason during the Plan Year shall share in the
salary reduction contributions made by the Employer for the year of termination
without regard to the Hours of Service credited.
(J) Notwithstanding anything to the contrary, for Plan Years beginning
after December 31, 1989, if this is a Plan that would otherwise fail to meet the
requirements of Code Section 401(a)(26), 410(b)(1) or 410(b)(2)(A)(i) and the
Regulations thereunder because Employer contributions would not be allocated to
a sufficient number or percentage of Participants for a Plan Year, then the
following rules shall apply:
(1) The group of participants eligible to share in the Employer's
contribution for the Plan Year shall be expanded to include the minimum
number of Leased Employees and Participants who would not otherwise be
eligible as are necessary to satisfy the applicable test specified above.
The specific Participants who shall become eligible under the terms of this
paragraph shall be those who are actively employed on the last day of the
Plan Year and, when compared to similarly situated Participants, have
completed the greatest number of Hours of Service in the Plan Year.
(2) If after application of paragraph (1) above, the applicable test
is still not satisfied, then the group of Participants eligible to share in
the Employer's contribution for the Plan Year shall be further expanded to
include the minimum number of Participants and Leased Employees who are not
actively employed on the last day of the Plan Year as are necessary to
satisfy the applicable test. The specific Participants who shall become
eligible to share shall be those Participants, when compared to similarly
situated Participants, who have completed the greatest number of Hours of
Service in the Plan Year before terminating employment.
(3) Nothing in this Section shall permit the reduction of a
Participant's accrued benefit. Therefore any amounts
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that have previously been allocated to Participants may not be reallocated
to satisfy these requirements. In such event, the Employer shall make an
additional contribution equal to the amount such affected Participants
would have received had they been included in the allocation, even if it
exceeds the amount which would be deductible under Code Section 404. Any
adjustment to the allocations pursuant to this paragraph shall be
considered a retroactive amendment adopted by the last day of the Plan
Year.
(4) Notwithstanding the foregoing, for any Top Heavy Plan Year
beginning after December 31, 1992, if the portion of the Plan which is not
a Code Section 401(k) or 401(m) plan would fail to satisfy Code Section
410(b) if the coverage tests were applied by treating those Participants
whose only allocation (under such portion of the Plan) would otherwise be
provided under the top heavy formula as if they were not currently
benefitting under the Plan, then, for purposes of this Section, such
Participants shall be treated as not benefitting and shall therefore be
eligible to be included in the expanded class of Participants who will
share in the allocation provided under the Plan's non top heavy formula.
3.05 ACTUAL DEFERRAL PERCENTAGE TESTS
(A) Maximum Annual Allocation: For Each Plan Year beginning after December
31, 1986, the annual allocation derived from Employer Elective Contributions for
a Participant's Elective Account shall satisfy one of the following tests:
(1) The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral Percentage"
of the Non-Highly Compensated Participant group multiplied by 1.25, or
(2) The excess of the "Actual Deferral Percentage" for the Highly
Compensated Participant group over the "Actual Deferral Percentage" for the
Non-Highly Compensated Participant group shall not be more than two
percentage
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points. Additionally, the "Actual Deferral Percentage" for the Highly
Compensated Participant group shall not exceed the "Actual Deferral
Percentage" for the Non-Highly Compensated Participant group multiplied by
2. The provisions of Code Section 401(k)(3) and Regulation 1.401(k)-1(b)
are incorporated herein by reference.
However, for Plan Years beginning after December 31, 1988, in order to
prevent the multiple use of the alternative method described in (2) above
and in Code Section 401(m)(9)(a), any Highly Compensated Participant
eligible to make elective deferrals pursuant to Section 3.02 and to make
Employee contributions or to receive matching contributions under this Plan
or under any other plan maintained by the Employer or a Related Employer
shall have his or her actual contribution ratio reduced pursuant to
Regulation 1.401(m)-2, the provisions of which are incorporated herein by
reference.
(B) For the purposes of this Section "Actual Deferral Percentage" means,
with respect to the Highly Compensated Participant group and Non-Highly
Compensated Participant group for a Plan Year, the average of the ratios,
calculated separately for each Participant in such group, of the amount of
Employer Elective Contributions allocated to each Participant's Elective Account
for such Plan Year, to such Participant's "414(s) Compensation" for such Plan
Year. The actual deferral ratio for each Participant and the "Actual Deferral
Percentage" for each group shall be calculated to the nearest one-hundredth of
one percent for Plan Years beginning after December 31, 1988. Employer Elective
Contributions allocated to each Non-Highly Compensated Participant's Elective
Account shall be reduced by Excess Deferred Compensation to the extent such
excess amounts are made under this Plan or any other plan maintained by the
Employer.
(C) For the purpose of determining the actual deferral ratio of a Highly
Compensated Employee who is subject to the Family Member aggregation rules of
Code Section 414(q)(6) because
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such Participant is either a "five percent owner" of the Employer or one of the
ten (10) Highly Compensated Employees paid the greatest "415 Compensation"
during the year, the following shall apply:
(1) The combined actual deferral ratio for the family group (which
shall be treated as one Highly Compensated Participant) shall be determined
by aggregating Employer Elective Contributions and "414(s) Compensation" of
all eligible Family Members (including Highly Compensated Participants).
However, in applying the $200,000 limit to "414(s) Compensation", for Plan
Years beginning after December 31, 1988, Family Members shall include only
the affected Employee's spouse and any lineal descendants who have not
attained age 19 before the close of the Plan Year. Notwithstanding the
foregoing, with respect to Plan Years beginning prior to January 1, 1990,
compliance with the Regulations then in effect shall be deemed to be
compliance with this paragraph.
(2) The Employer Elective Contributions and "414(s) Compensation" of
all Family Members shall be disregarded for purposes of determining the
"Actual Deferral Percentage" of the Non-Highly Compensated Participant
group except to the extent taken into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of more
than one family group in a plan, all Participants who are members of those
family groups that include the Participant are aggregated as one family
group in accordance with paragraphs (1) and (2) above.
(D) For the purposes of Sections 3.05(A) and 3.06 , a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any Employee
eligible to make a deferral election pursuant to Section 3.02, whether or not
such deferral election was made or suspended pursuant to Section 3.02.
(E) For the purposes of this Section and Code Sections 401(a)(4), 410(b)
and 401(k), if two or more plans which include cash or deferred arrangements are
considered one plan for the
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purposes of Code Section 401(a)(4) or 410(b) (other than Code Section
410(b)(2)(A)(ii) as in effect for Plan Years beginning after December 31, 1988),
the cash or deferred arrangements included in such plans shall be treated as one
arrangement. In addition, two or more cash or deferred arrangements may be
considered as a single arrangement for purposes of determining whether or not
such arrangements satisfy Code Sections 401(a)(4), 410(b) and 401(k). In such a
case, the cash or deferred arrangements included in such plans and the plans
including such arrangements shall be treated as one arrangement and as one plan
for purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k).
Plans may be aggregated under this paragraph (E) for Plan Years beginning after
December 31, 1989 only if they have the same plan year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section 4975(e)(7) or
409 may not be combined with this Plan for purposes of determining whether the
employee stock ownership plan or this Plan satisfies this Section and Code
Sections 401(a)(4), 410(b) and 401(k).
(F) For the purposes of this Section, if a Highly Compensated Participant
is a Participant under two or more cash or deferred arrangements (other than a
cash or deferred arrangement which is part of an employee stock ownership plan
as defined in Code Section 4975(e)(7) or 409 for Plan Years beginning after
December 31, 1988) of the Employer or a Related Employer, all such cash or
deferred arrangements shall be treated as one cash or deferred arrangement for
the purposes of determining the actual deferral ratio with respect to such
Highly Compensated Participant. However, for Plan Years beginning after December
31, 1988, if the cash or deferred arrangements have different plan years, this
paragraph shall be applied by treating all cash or deferred arrangements ending
with or within the same calendar year as a single arrangement.
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3.06 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS
In the event that the initial allocations of the Employer's Elective
Contributions made pursuant to Section 3.04 do not satisfy one of the tests set
forth in Section 3.05(A) for Plan Years beginning after December 31, 1986, the
Plan Administrator shall adjust Excess Contributions pursuant to the options set
forth below:
(A) On or before the fifteenth day of the third month following the
end of each Plan Year, the Highly Compensated Participant having the
highest actual deferral ratio shall have his or her portion of Excess
Contributions distributed until one of the tests set forth in Section
3.05(A) is satisfied, or until his or her actual deferral ratio equals the
actual deferral ratio of the Highly Compensated Participant having the
second highest actual deferral ratio. This process shall continue until one
of the tests set forth in Section 3.05(A) is satisfied. For each Highly
Compensated Participant, the amount of Excess Contributions is equal to the
Elective Contributions on behalf of such Highly Compensated Participant
(determined prior to the application of this paragraph) minus the amount
determined by multiplying the Highly Compensated Participant's actual
deferral ratio (determined after application of this paragraph) by his or
her "414(S) Compensation". However, in determining the amount of Excess
Contributions to be distributed with respect to an affected Highly
Compensated Participant as determined herein, such amount shall be reduced
by any Excess Deferred Compensation previously distributed to such affected
Highly Compensated Participant for his or her taxable year ending with or
within such Plan Year.
(1) With respect to the distribution of Excess Contributions
pursuant to (a) above, such distribution:
(i) may be postponed but not later than the close of the
Plan Year following the Plan Year to which they are allocable;
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(ii) shall be made simultaneously from Deferred
Compensation and matching contributions which relate to such
Deferred Compensation provided, however, that any such matching
contributions which are not Vested shall be forfeited in lieu of
distribution;
(iii) shall be adjusted for Income; and
(iv) shall be designated by the Employer as a distribution
of Excess Contributions (and Income).
(2) Any distribution of less than the entire amount of Excess
Contributions shall be treated as a pro rata distribution of Excess
Contributions and Income.
(3) The determination and correction of Excess Contributions of a
Highly Compensated Participant whose actual deferral ratio is
determined under the family aggregation rules shall be accomplished by
reducing the actual deferral ratio as required herein, and the Excess
Contributions of the family unit shall then be allocated among the
Family Members in proportion to the Elective Contributions of each
Family Member that were combined to determine the group actual
deferral ratio. Notwithstanding the foregoing, with respect to Plan
Years beginning prior to January 1, 1990, compliance with the
Regulations then in effect shall be deemed to be compliance with this
paragraph.
(B) Within twelve (12) months after the end of the Plan Year, the
Employer may make a special Qualified Non-Elective Contribution on behalf
of Non-Highly Compensated Participants in an amount sufficient to satisfy
one of the tests set forth in Section 3.05(A). Such contribution shall be
allocated to the Participant's Elective Account of each Non-Highly
Compensated Participant in the same proportion that each Non-Highly
Compensated Participant's Compensation
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for the year bears to the total Compensation of all Non-Highly Compensated
Participants.
(C) If during a Plan Year the projected aggregate amount of Elective
Contributions to be allocated to all Highly Compensated Participants under
this Plan would, by virtue of the tests set forth in Section 3.05(A), cause
the Plan to fail such tests, then the Plan Administrator may automatically
reduce proportionately or in the order provided in Section 3.06(A) each
affected Highly Compensated Participant's deferral election made pursuant
to Section 3.02 by an amount necessary to satisfy one of the tests set
forth in Section 3.06(A).
3.07 ACTUAL CONTRIBUTION PERCENTAGE TESTS
(A) The "Actual Contribution Percentage" for Plan Years beginning after
December 31, 1986 for the Highly Compensated Participant group shall not exceed
the greater of:
(1) 125 percent of such percentage of the Non-Highly Compensated
Participant group; or
(2) the lesser of 200 percent of such percentage for the Non-Highly
Compensated Participant group, or such percentage for the Non-Highly
Compensated Participant group plus 2 percentage points. However, for Plan
Years beginning after December 31, 1988, in order to prevent the multiple
use of the alternative method described in this paragraph and in Code
Section 401(m)(9)(a), any Highly Compensated Participant eligible to make
elective deferrals pursuant to Section 3.02 or any other cash or deferred
arrangement maintained by the Employer or a Related Employer and to make
Employee contributions or to receive matching contributions under this Plan
or under any other plan maintained by the Employer or a Related Employer
shall have his or her actual contribution ratio reduced pursuant to
Regulation 1.401(m)-2. The provisions of Code Section 401(m) and
Regulations 1.401(m)-1(b) and 1.401(m)-2 are incorporated herein by
reference.
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(B) For the purposes of this Section and Section 3.08 "Actual Contribution
Percentage" for a Plan Year means, with respect to the Highly Compensated
Participant group and Non-Highly Compensated Participant group, the average of
the ratios, calculated separately for each Participant in such group, of
(1) the sum of Employer matching contributions made pursuant to
Section 3.01(B) on behalf of each such Participant for such Plan Year;
to
(2) the Participant's "414(s) Compensation" for the such Plan
Year.
(C) For purposes of determining the "Actual Contribution Percentage" and
the amount of Excess Aggregate Contributions pursuant to Section 3.08(D), only
Employer matching contributions (excluding Employer matching contributions
distributed pursuant to Sections 3.02(F) and 3.06(A)) contributed to the Plan
prior to the end of the succeeding Plan Year shall be considered. In addition,
the Plan Administrator may elect to take into account, with respect to Employees
eligible to have Employer matching contributions pursuant to Section 3.01(B)
allocated to their accounts, elective deferrals (as defined in Regulation
1.402(g)-1(b) and qualified non-elective contributions (as defined in Code
Section 401(m)(C)) contributed to any plan maintained by the Employer. Such
elective deferrals and qualified non-elective contributions shall be treated as
Employer matching contributions subject to Regulation 1.401(m)-1(b)(5) which is
incorporated herein by reference. However, for Plan Years beginning after
December 31, 1988, the Plan Year must be the same as the plan year of the plan
to which the elective deferrals and the qualified non-elective contributions are
made.
(D) For the purpose of determining the actual contribution ratio of a
Highly Compensated Employee who is subject to the Family Member aggregation
rules of Code Section 414(q)(6) because such Participant is either a "five
percent owner" of the Employer or one of the ten (10) Highly Compensated
Employees paid the greatest "415 Compensation" during the year, the following
shall apply:
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(1) The combined actual contribution ratio for the family group (which
shall be treated as one Highly Compensated Participant) shall be determined
by aggregating Employer matching contributions made pursuant to Section
3.01(B) and "414(s) Compensation" of all eligible Family Members (including
Highly Compensated Participants). However, in applying the $200,000 limit
to "414(s) Compensation", for Plan Years beginning after December 31, 1988,
Family Members shall include only the affected Employee's spouse and any
lineal descendants who have not attained age 19 before the close of the
Plan Year. Notwithstanding the foregoing, with respect to Plan Years
beginning prior to January 1, 1990, compliance with the Regulations then in
effect shall be deemed to be compliance with this paragraph.
(2) The Employer matching contributions made pursuant to Section
3.01(B) and "414(s) Compensation" of all Family Members shall be
disregarded for purposes of determining the "Actual Contribution
Percentage" of the Non-Highly Compensated Participant group except to the
extent taken into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of more
than one family group in a plan, all Participants who are members of those
family groups that include the Participant are aggregated as one family
group in accordance with paragraphs (1) and (2) above.
(E) For the purposes of this Section and Code Sections 401(a)(4), 410(b)
and 401(m), if two or more plans of the Employer to which matching
contributions, Employee contributions, or both, are made are treated as one plan
for the purposes of Code Section 401(a)(4) or 410(b) (other than the average
benefits test under Code Section 410(b)(2)(A)(ii) as in effect for Plan Years
beginning after December 31, 1988), such plans shall be treated as one plan. In
addition, two or more plans of the Employer to which matching contributions,
Employee contributions, or both, are made may be considered as a single plan for
purposes
48.
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of determining whether or not such plans satisfy Code Sections 401(a)(4), 410(b)
and 401(m). In such a case, the aggregated plans must satisfy this Section and
Code Sections 401(a)(4), 410(b) and 401(m) as though such aggregated plans were
a single plan. Plans may be aggregated under this paragraph (E) for Plan Years
beginning after December 31, 1989 only if they have the same plan year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section 4975(e)(7) or
409 may not be aggregated with this Plan for purposes of determining whether the
employee stock ownership plan or this Plan satisfies this Section and Code
Sections 401(a)(4), 410(b) and 401(m).
(F) If a Highly Compensated Participant is a Participant under two or more
plans (other than an employee stock ownership plan as defined in Code Section
4975(e)(7) or 409 for Plan Years beginning after December 31, 1988) which are
maintained by the Employer or a Related Employer to which matching
contributions, Employee contributions, or both, are made, all such contributions
on behalf of such Highly Compensated Participant shall be aggregated for the
purposes of determining the actual contribution ratio with respect to such
Highly Compensated Participant. However, for Plan Years beginning after
December 31, 1988, if the plans have different plan years, this paragraph shall
be applied by treating all cash or deferred arrangements ending with or within
the same calendar year as a single plan.
(G) For purposes of Sections 3.07(A) and 3.08, a Highly Compensated
Participant and Non-Highly Compensated Participant shall include any Employee
eligible to have Employer matching contributions pursuant to Section 3.01(B)
(whether or not a deferral election was made or suspended pursuant to Section
3.02(E)) allocated to his or her account for the Plan Year.
3.08 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS
(A) In the event that, for Plan Years beginning after December 31, 1986,
the "Actual Contribution Percentage" for the
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Highly Compensated Participant group exceeds the Actual Contribution Percentage
for the Non-Highly Compensated Participant group pursuant to Section 3.07(A),
the Plan Administrator (on or before the fifteenth day of the third month
following the end of the Plan Year, but in no event later than the close of the
following Plan Year) shall direct the Trustee to distribute to the Highly
Compensated Participant having the highest actual contribution ratio, his or her
portion of Excess Aggregate Contributions (and income allocable to such
contributions) until either one of the tests set forth in Section 3.07(A) is
satisfied, or until his or her actual contribution ratio equals the actual
contribution ratio of the Highly Compensated Participant having the second
highest actual contribution ratio. This process shall continue until one of the
tests set forth in Section 3.07(A) is satisfied.
(B) Any distribution of less than the entire amount of Excess Aggregate
Contributions (and income) shall be treated as a pro rata distribution of Excess
Aggregate Contributions and income. Distribution of Excess Aggregate
Contributions shall be designated by the Employer as a distribution of Excess
Aggregate Contributions (and Income).
(C) Excess Aggregate Contributions shall be treated as Employer
contributions for purposes of Code Sections 404 and 415 even if distributed from
the Plan.
(D) For each Highly Compensated Participant, the amount of Excess
Aggregate Contributions is equal to the Employer matching contributions made
pursuant to Section 3.01(B) and any qualified non-elective contributions or
elective deferrals taken into account pursuant to Section 3.07(C) on behalf of
such Highly Compensated Participant (determined prior to the application of this
paragraph) minus the amount determined by multiplying the Highly Compensated
Participant's actual contribution ratio (determined after application of this
paragraph) by his or her "414(s) Compensation". However, in determining the
amount of Excess Contributions to be distributed with respect to an affected
Highly Compensated Participant as determined herein,
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such amount shall be reduced by any Excess Deferred Compensation previously
distributed to such affected Highly Compensated Participant for his or her
taxable year ending with or within such Plan Year. The actual contribution ratio
must be rounded to the nearest one-hundredth of one percent for Plan Years
beginning after December 31, 1988. In no case shall the amount of Excess
Aggregate Contribution with respect to any Highly Compensated Participant exceed
the amount of Employer matching contributions made pursuant to Section 3,01(B)
and any qualified non-elective contributions or elective deferrals taken into
account pursuant to Section 3.07(C) on behalf of such Highly Compensated
Participant for such Plan Year.
(E) The determination of the amount of Excess Aggregate Contributions with
respect to any Plan Year shall be made after first determining the Excess
Contributions, if any, to be treated as voluntary Employee contributions due to
recharacterization for the plan year of any other qualified cash or deferred
arrangement (as defined in Code Section 401(k)) maintained by the Employer that
ends with or within the Plan Year.
(F) If the determination and correction of Excess Aggregate Contributions
of a Highly Compensated Participant whose actual contribution ratio is
determined under the family aggregation rules, then the actual contribution
ratio shall be reduced and the Excess Aggregate Contributions for the family
unit shall be allocated among the Family Members in proportion to the sum of
Employer matching contributions made pursuant to Section 3.01(B) and any
qualified non-elective contributions or elective deferrals taken into account
pursuant to Section 3.07(C) of each Family Member that were combined to
determine the group actual contribution ratio. Notwithstanding the foregoing,
with respect to Plan Years beginning prior to January 1, 1990, compliance with
the Regulations then in effect shall be deemed to be compliance with this
paragraph.
(G) If during a Plan Year the projected aggregate amount of Employer
matching contributions to be allocated to all Highly Compensated Participants
under this Plan would, by virtue of the
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tests set forth in Section 3.07(A), cause the Plan to fail such tests, then the
Plan Administrator may automatically reduce proportionately or in the order
provided in Section 3.08(A) each affected Highly Compensated Participant's
projected share of such contributions by an amount necessary to satisfy one of
the tests set forth in Section 3.07(A).
(H) Notwithstanding the above, within twelve (12) months after the end of
the Plan Year, the Employer may make a special Qualified Non-Elective
Contribution on behalf of Non-Highly Compensated Participants in an amount
sufficient to satisfy one of the tests set forth in Section 3.07(A). Such
contribution shall be allocated to the Participant's Elective Account of each
Non-Highly Compensated Participant in the same proportion that each Non-Highly
Compensated Participant's Compensation for the year bears to the total
Compensation of all Non-Highly Compensated Participants. A separate accounting
shall be maintained for the purpose of excluding such contributions from the
"Actual Deferral Percentage" tests pursuant to Section 3.05(A).
3.09 MAXIMUM ANNUAL ADDITION.
(A) The Annual Addition to a Participant's Account shall not exceed the
lesser of Thirty Thousand Dollars ($30,000.00) (or such greater amount as may be
determined by the Secretary of the Treasury) or twenty-five percent (25%) of the
Participant's Compensation (as defined in Code Section 415(c)(3) and such
regulations thereunder as may be promulgated) for that Plan Year.
(B) The term "Annual Addition" for any Limitation Year means the sum of:
(1) The Employer Contributions; and
(2) The Employee's allocable share of Forfeitures; and
(3) The Employee's contributions, for Limitation Years beginning
after December 31, 1986; and
(4) Amounts allocated after March 31, 1984, to an individual medical
account, as defined in Code Section
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415(1)(1), which is part of a pension or annuity plan maintained by the
Employer; and
(5) 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 Code Section 419A(d)(3)) under a welfare benefit
plan (as defined in Code Section 419(e)) maintained by the Employer.
(C) For purposes of applying the limitations of Code Section 415, the
following are not Annual Additions: (1) transfer of funds from one qualified
plan to another; (2) rollover contributions (as defined in Code Sections
402(a)(5), 403(a)(4), 408(d)(3) and 408(b)(3)(C)); (3) repayments of loans made
to a Participant from the Plan; (4) repayments of distributions received by an
Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (5) repayments of
distributions received by an Employee pursuant to Code Section 411(a)(3)(D)
(mandatory contributions); and (6) deductible Employee contributions to a
qualified Plan.
(D) For purposes of applying the limitations of Code Section 415, "415
Compensation" shall include the Participant's wages, salaries, fees for
professional service and other amounts for personal services actually rendered
in the course of employment with an Employer maintaining the Plan (including,
but not limited to, commissions paid salesmen, compensation for services on the
basis of a percentage of profits, commissions on insurance premiums, tips and
bonuses and in the case of a Participant who is an Employee within the meaning
of Code Section 401(c)(1) and the regulations thereunder, the Participant's
earned income (as described in Code Section 401(c)(2) and the regulations
thereunder) paid during the Limitation Year. "415 Compensation" shall exclude:
(1)(A) contributions made by the Employer to a plan of deferred compensation to
the extent that, before the application of the Code Section 415 limitations to
the Plan, the contributions are not includable in the gross income of
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the Employee for the taxable year in which contributed, (B) Employer
contributions made on behalf of an Employee to a simplified employee pension
plan described in Code Section 408(k) to the extent such contributions are
deductible by the Employee under Code Section 219(a), (C) any distributions from
a plan of deferred compensation regardless of whether such amounts are
includable in the gross income of the Employee when distributed except any
amounts received by an Employee pursuant to an unfunded non-qualified plan to
the extent such amounts are includable in the gross income of the Employee; (2)
amounts realized from the exercise of a non-qualified stock option or when
restricted stock (or property) held by an Employee either becomes freely
transferable or is no longer subject to a substantial risk of forfeiture; (3)
amounts realized from the sale, exchange or other disposition of stock acquired
under a qualified stock option; and (4) other amounts which receive special tax
benefits, such as premiums for group term life insurance (but only to the extent
that the premiums are not includable in the gross income of the Employee), or
contributions made by the Employer (whether or not under a salary reduction
agreement) towards the purchase of any annuity contract described in Code
Section 403(b) (whether or not the contributions are excludable from the gross
income of the Employee).
(E) For purposes of applying the limitations of Code Section 415, the
Limitation Year shall be the Plan Year.
(F) The dollar limitation under Code Section 415(b)(1)(A) stated in
paragraph (a)(1) above shall be adjusted annually as provided in Code Section
415(d) pursuant to regulations. The adjusted limitation is effective as of
January 1st of each calendar year and is applicable to Limitation Years ending
with or within that calendar year.
(G) For the purpose of this Section, all qualified defined benefit pension
plans (whether terminated or not) ever maintained by the Employer shall be
treated as one defined benefit plan, and all qualified defined contribution
plans (whether terminated or
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not) ever maintained by the Employer shall be treated as one defined
contribution plan.
(H) For the purpose of this Section, if the Employer is a member of a
controlled group of corporations, trades or businesses under common control (as
defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by
Code Section 414(h) or is a member of an affiliated service group (as defined by
Code Section 414(m)), all Employees of such Employers shall be considered to be
employed by a single Employer.
(I) For the purpose of this Section, if this Plan is a Code Section 413(c)
plan, all Employers of a Participant who maintain this Plan will be considered
to be a single Employer.
3.10 MULTIPLE PLAN REDUCTION. Subject to the exception in Section
3.10(E) below, if an Employee is (or has been) a Participant in one or more
defined benefit plans and one or more defined contribution plans maintained by
the Employer, the sum of the defined benefit plan fraction and the defined
contribution plan fraction for any limitation year may not exceed 1.0.
(A) Defined Benefit Plan Fraction:
-----------------------------
(1) The defined benefit plan fraction for any Limitation Year is a
fraction (a) the numerator of which is the "projected annual benefit" of
the Participant under the Plan (determined as of the close of the
Limitation Year), and (b) the denominator of which is the greater of (i)
the product of 1.25 multiplied by the "protected current accrued benefit"
or (ii) the lesser of (a) the product of 1.25 multiplied by the maximum
dollar limitation provided under Code Section 415(b)(1)(A) for such
limitation year, or (b) the product of 1.4 multiplied by the amount which
may be taken into account under Code Section 415(b)(1)(B) for such
Limitation Year.
(2) For purposes of applying the limitations of Code Section 415, the
"projected annual benefit" for any Participant is the benefit, payable
annually, under
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the terms of the Plan determined pursuant to Regulation Section 1.415-
7(b)(3).
(3) For purposes of applying the limitations of Code Section 415,
"protected current accrued benefit" for any Participant in a defined
benefit plan in existence on July 1, 1982 shall be the accrued benefit,
payable annually, provided for under question T-3 of Internal Revenue
Service Notice 83-10.
(B) Defined Contribution Plan Fraction:
----------------------------------
(1) The defined contribution plan fraction for any Limitation Year is
a fraction (a) the numerator of which is the sum of the Annual Additions to
the Participant's account as of the close of the Limitation Year and (b)
the denominator of which is the sum of the lesser of the following amounts
determined for such year and each prior year of service with the Employer:
(i) the product of 1.25 multiplied by the dollar limitation in effect under
Code Section 415(c)(1)(A) for such Limitation Year (determined without
regard to Code Section 415(c)(6)), or (ii) the product of 1.4 multiplied by
the amount which may be taken into account under Code Section 415(c)(1)(B)
for such Limitation Year.
(2) Notwithstanding the foregoing, the numerator of the defined
contribution plan fraction shall be adjusted pursuant to Regulation 1.415-
7(d)(1) and questions T-6 and T-7 of Internal Revenue Service Notice 83-10.
(3) For defined contribution plans in effect on or before July 1,
1982, the Plan Administrator may elect, for any Limitation Year ending
after December 31, 1982, that the amount taken into account in the
denominator for every Participant for all limitation years ending before
January 1, 1983 shall be an amount equal to the product of (a) the
denominator for the Limitation Year ending in 1982 determined under the law
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in effect for the Limitation Year ending in 1982 multiplied by (b) the
transition fraction.
(4) For purposes of the preceding paragraph, the term "transition
fraction" shall mean a fraction (a) the numerator of which is the lesser of
(i) Fifty-One Thousand Eight Hundred Seventy-Five and No/100 Dollars
($51,875.00), or (ii) 1.4 multiplied by twenty-five percent (25%) of the
Participant's Compensation for the Limitation Year ending in 1981, and (b)
the denominator of which is the lesser of (i) Forty-One Thousand Five
Hundred and No/100 Dollars ($41,500.00) or (ii) twenty-five percent (25%)
of the Participant's Compensation for the Limitation Year ending in 1981.
(5) Notwithstanding the foregoing, for any Limitation Year in which
the Plan is a Top Heavy Plan, Forty-One Thousand Five Hundred and No/100
Dollars ($41,500.00) shall be substituted for Fifty-One Thousand Eight
Hundred Seventy-Five and No/100 Dollars ($51,875.00) in determining the
transition fraction unless the extra minimum allocation is being provided
pursuant to Section 3.04. However, for any Limitation Year in which this
Plan is a Super Top Heavy Plan, Forty-One Thousand Five Hundred and No/100
Dollars ($41,500.00) shall be substituted for Fifty-One Thousand Eight
Hundred Seventy-Five and No/100 Dollars ($51,875.00) in any event.
(6) If the Employer maintained this Plan and a defined benefit plan on
May 6, 1986 and if both plans satisfied the requirements of Code Section
415 for the last limitation year beginning before January 1, 1987, the
numerator of the defined contribution fraction shall be reduced by an
amount equal to the product of:
(a) the sum of the defined contribution fraction plus the defined
benefit fraction as of the "determination date" minus one (1), times
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(b) the denominator of the defined contribution fraction as of
the "determination date".
The "determination date" is the day immediately preceding the first
limitation year beginning after 1986. The fractions in (a) and (b) above
shall be computed in accordance with Code Section 415 as amended by the Tax
Reform Act of 1986 and Section 1106(i)(3) of the Tax Reform Act of 1986.
The adjustment will be made only after any accruals in excess of the Tax
Reform Act of 1986 Section 415 limits are reduced as described in Q&A-13 of
IRS Notice 87-21. The adjustment to the defined contribution fraction will
be made after the elimination of any such excess accruals, or, if not
eliminated, ignoring any such excess accruals. Changes in the terms and
conditions of the plan made after May 5, 1986 shall not be recognized in
making the defined contribution fraction adjustment.
(C) TOP HEAVY AND SUPER TOP HEAVY ADJUSTMENT OF FRACTION. Notwithstanding
the foregoing, for any Limitation Year in which the Plan is a Top Heavy Plan,
1.0 shall be substituted for 1.25 in paragraphs (A)(1) and (B)(1) unless the
extra minimum allocation is being provided pursuant to Section 3.04. However,
for any Limitation Year in which the Plan is a Super Top Heavy Plan, 1.0 shall
be substituted for 1.25 in any event.
(D) EXCESS BENEFITS. If the sum of the defined benefit plan fraction and
the defined contribution plan fraction shall exceed 1.0 in any Limitation Year
for any Participant in this Plan for reasons other than described in (E) below,
the Plan Administrator shall limit, to the extent necessary, the Annual
Additions to such Participant's accounts for the Limitation Year. If, after
limiting the Annual Additions to such Participant's accounts for the Limitation
Year, the sum of the defined benefit plan fraction and the defined contribution
plan fraction still exceeds 1.0, the Plan Administrator shall then adjust the
numerator of the defined benefit plan fraction so that the sum of
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both fractions shall not exceed 1.0 in any Limitation Year for such Participant.
(E) EXCESS BENEFITS DUE TO TRANSITION FRACTION. If (1) the substitution of
1.0 for 1.25 and Forty-One Thousand Five Hundred Dollars ($41,500.00) for Fifty-
One Thousand Eight Hundred Seventy-Five Dollars ($51,875.00) above or (2) the
excess benefit accruals or Annual Additions provided for in Internal Revenue
Service Notice 82-19 cause the 1.0 limitation to be exceeded for any Participant
in any Limitation Year, such Participant shall be subject to the following
restrictions for each future Limitation Year until the 1.0 limitation is
satisfied: (1) the Participant's accrued benefit under the defined benefit plan
shall not increase, (2) no Annual Additions may be credited to a Participant's
accounts, and (3) no Employee contributions (voluntary or mandatory) shall be
made under any defined benefit plan or any defined contribution plan of the
Employer.
3.11 ADJUSTMENT FOR EXCESS ANNUAL ADDITIONS.
(A) If as a result of the allocation of Forfeitures, a reasonable error in
estimating a Participant's Compensation or other facts and circumstances to
which Regulation Section 1.415-6(b)(6) shall be applicable, the Annual Additions
under this Plan would cause the maximum Annual Addition to be exceeded for any
Participant, the Plan Administrator shall (1) return any Elective Contributions
credited for the Limitation Year to the extent that the return would reduce the
excess amount in the Participant's accounts, (2) hold any excess amount
remaining after the return of any Elective Contributions in a "Section 415
suspense account", (3) allocate and reallocate the "Section 415 suspense
account" in the next Limitation Year (and succeeding Limitation Years if
necessary) to all Participants in the Plan before any Employer or Employee
contributions which would constitute Annual Additions are made to the Plan for
such Limitation Year, and (4) reduce Employer Contributions to the Plan for
such Limitation Year by the amount of the "Section 415
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suspense account" allocated and reallocated during such Limitation Year.
(B) For purposes of this Article, "excess amount" for any Participant for a
Limitation Year shall mean the excess, if any, of (1) the Annual Additions which
would be credited to the Participant's account under the terms of the Plan
without regard to the limitations of Code Section 415 over (2) the maximum
Annual Additions determined pursuant to Section 3.09.
(C) For purposes of this Section, "Section 415 suspense account" shall mean
an unallocated account equal to the sum of excess amounts for all Participants
in the Plan during the Limitation Year. The "Section 415 suspense account"
shall not share in any earnings or losses of the Trust Fund.
(D) The Plan may not distribute "excess amounts" to Participants or former
Participants.
3.12 TERMINATION OF EMPLOYMENT. Upon termination of employment for any
reason other than death, disability, or normal retirement, and subject to the
provisions of Articles V and VI, a Participant's Accrued Benefits, if any, shall
be maintained in the Participant's Employer Contribution Account and shall
continue to receive income allocations pursuant to this Article III until
distributed pursuant to Articles V and VI. In the event of termination of
employment, the Participant shall not share in the Employer Contribution or for
the year in which termination occurred unless otherwise provided in Section
3.04.
3.13 RESTORATION OF ACCOUNT. If an Employee who has received a
distribution of all or a portion of the vested benefit is subsequently
reemployed, such Employee may at any time following reemployment but before the
earlier of (a) five (5) years after the date of reemployment or (b) the date
such Employee incurs five (5) consecutive One-Year Breaks in Service following
the date of distribution, repay the full amount of the distribution attributable
to Employer Contributions.
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3.14 VALUATION OF THE TRUST FUND. The Trustee as of the last day of each
Plan Year shall determine the net worth of the assets of the Trust Fund at the
fair market value of the assets as of the Valuation Date and report such value
to the Plan Administrator in writing. Such valuation shall not include any
contribution made by the Employer as of such Valuation Date.
3.15 VALUATION OF PARTICIPANT'S ACCOUNT. In making a valuation for the
purposes of computing the then value of a Participant's account upon termination
of employment or any termination described under Articles V or VI hereof,
valuation shall be made as of the last day of the Plan Year preceding the year
in which any such termination occurs, or at such other time as the Plan
Administrator shall determine in a uniform and nondiscriminatory basis. The
foregoing notwithstanding, in the event that a terminated Participant does not
receive a distribution of the Accrued Benefit during the Plan Year in which the
termination occurs, such Participant shall be entitled to a share of earnings or
losses on his or her account balance until the Accrued Benefit is actually
distributed.
3.16 ALLOCATION. The Trustee shall allocate respectively to each
Participant's Employer Contribution Account all items of income, investment
gains and losses, expenses, and similar credits or deductions attributable to
the investment elections made by each Participant.
3.17 DIRECTED INVESTMENT ACCOUNT.
(A) Participants may direct the Trustee as to the investment of all or a
portion of the vested interest in any one or more of their individual account
balances, including their voluntary contributions account, if any, and their
rollover account, if any. Participants may, subject to a procedure established
by the Plan Administrator and applied in a uniform nondiscriminatory manner,
direct the Trustees in writing to invest of their accounts in specific assets so
long as such
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investment is not otherwise prohibited by the terms of the Plan. To the extent
so directed, the Trustees are relieved of their fiduciary responsibilities as
provided in Section 404 of ERISA.
(B) A separate Directed Investment Account shall be established for each
Participant who has directed an investment. Transfers between the Participant's
Account and the Directed Investment Account shall be charged and credited as the
case may be to each account. The Directed Investment Account shall not share in
trust fund earnings, but shall be charged or credited as appropriate with the
net earnings, gains, losses and expenses as well as appreciation or depreciation
in market value during each Plan Year attributable to such account. Such
amounts shall not be considered in determining trust fund gains or losses.
(C) The Plan Administrator, Trustee or any other person shall be under no
duty to review any securities or other property selected as a Directed
Investment or to make any suggestion to a Participant concerning a Directed
Investment.
(D) Notwithstanding the foregoing, the Trustee shall not at any time after
December 31, 1981, invest any portion of a Directed Investment Account in
"Collectibles" within the meaning of that term as used in Code Section 408(m).
ARTICLE IV.
VESTING
4.01 VESTING. A Participant shall be fully vested in his or her Accrued
Benefit, and such Accrued Benefit shall not be subject to forfeiture.
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ARTICLE V.
DISTRIBUTIONS OF BENEFITS ACCRUED ON AND AFTER JANUARY 1, 1995
5.01 RETIREMENT. Every Participant may, upon reasonable notice to the
Employer, retire for the purposes of this Plan on his or her Normal Retirement
Date. If a Participant continues in the employment of the Employer after his or
her Normal Retirement Date, such Participant shall continue to be treated in all
respects as a Participant until actual retirement. Upon such actual
retirement, participation hereunder shall cease. The Employer, in accordance
with the provisions of Section 5.07 shall direct the Trustee to distribute such
Participant's Accrued Benefit to the Participant. The distribution of a
Participant's Accrued Benefit upon early retirement, normal retirement or actual
retirement after normal retirement shall, subject to Section 5.07, commence not
later than one hundred twenty (120) days after the last day of the Plan Year in
which such retirement occurs.
A Participant who continues in the employment of the Employer after his or
her Normal Retirement Date may, at the election of the Participant, take a
distribution of all or part of his or her account balance notwithstanding that
such Participant has not separated from service.
5.02 DISTRIBUTION UPON DEATH.
(A) Death Before Retirement or Termination of Service. Upon the death of a
-------------------------------------------------
Participant before retirement or other termination of employment, the Plan
Administrator shall direct the Trustee to distribute such Participant's Accrued
Benefit to any surviving beneficiary designated by the Participant, subject to
the restrictions of Section 5.04. The manner of payment shall be governed by
Section 5.07 and said distribution shall commence not later than one hundred
twenty (120) days after the end of the Plan Year in which proof of death is
received.
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(B) Death After Termination of Service. Upon the death of a former
----------------------------------
Participant in the Plan, the Plan Administrator shall direct the Trustee to
distribute any part of such former Participant's Accrued Benefit that has not
been distributed to the former Participant at the time of his or her death to
any surviving beneficiary designated by such former Participant, subject to the
restrictions of Section 5.04. The manner of payment shall be governed by
Section 5.07 and shall commence not later than one hundred twenty (120) days
after the end of the Plan Year in which proof of death is received. As used
herein, "former Participant" means any person who has ceased to be a Participant
hereunder because of termination of employment for any reason other than death.
(C) Required Distributions Upon Death.
---------------------------------
(1) If the distribution of a Participant's interest has begun in
accordance with a method selected in Section 5.07 and the Participant dies
before his or her entire interest has been distributed to such Participant,
the remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution selected pursuant to Section
5.07 as of the date of death.
(2) If a Participant dies before beginning to receive any
distributions of his or her interest under the Plan, the entire interest
shall be distributed to his or her beneficiaries within five (5) years
after the death of the Participant.
(3) The five (5) year distribution requirement of Section 5.02(C)(2)
shall not apply to any portion of the deceased Participant's interest which
is payable to or for the benefit of a designated beneficiary. In such
event, such portion may be distributed over the life of such designated
beneficiary (or over a period not extending beyond the life expectancy of
such designated beneficiary) provided such distribution begins not later
than one (1) year after the date of the Participant's death (or such later
date as may be prescribed by Treasury regulations).
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Except, however, in the event that the Participant's spouse is the
designated beneficiary, the requirement that distributions commence within
one (1) year of a Participant's death shall not apply. In lieu thereof,
such distribution must commence no later than the date on which the
deceased Participant would have attained age seventy and one-half (70 1/2).
If the surviving spouse dies before the distributions to such spouse begin,
then the five (5) year distribution requirement of Section 5.02(C)(2) shall
apply as if the spouse were a Participant.
(4) For the purposes of this Section, the life expectancy of a
Participant and a Participant's spouse (other than in the case of a life
annuity) may, at the election of the Participant or the Participant's
spouse, be redetermined in accordance with regulations. The election, once
made, shall be irrevocable. If no election is made by the time
distributions must commence, then the life expectancy of the Participant
and the Participant's spouse shall not be subject to recalculation. Life
expectancy and joint and last survivor expectancy shall be computed using
the return multiples in Tables V and VI of Regulation Section 1.72-9.
(5) The restrictions imposed by this Section shall not apply if a
Participant has, prior to January 1, 1984, made a written designation to
have his or her death benefits paid in an alternative method acceptable
under Code Section 401(a) as in effect prior to the enactment of the Tax
Equity and Fiscal Responsibility Act of 1982. Any such written
designation made by a Participant shall be binding upon the Plan
Administrator notwithstanding the provisions of this Section.
5.03 PROOF OF DEATH. The Plan Administrator may require such proper
proof of death and evidence of the right of any person to receive payment of the
Accrued Benefits of the deceased Participant or former Participant as the Plan
Administrator may
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deem desirable. The Plan Administrator's determination of death and of the right
of any person to receive payment shall, subject to the claim provisions
contained in Sections 9.01 and 9.02, be conclusive.
5.04 DESIGNATION OF BENEFICIARY.
(A) Beneficiary if Participant is Married. Effective for Plan Years
-------------------------------------
beginning after December 31, 1984, unless otherwise elected in the manner
prescribed in this Section, the beneficiary of any death benefit payable on the
death of a married Participant shall be the Participant's spouse, unless the
spouse has validly waived his or her right to be the Participant's beneficiary
and has consented to a specific alternate beneficiary. The waiver and consent
by a spouse of his or her right to be the death benefit beneficiary shall be in
writing, shall acknowledge the effect of such election and shall be witnessed by
a Plan representative or a notary public. Such waiver and consent shall not be
required if it is established to the satisfaction of the Plan Administrator that
the required waiver cannot be obtained because there is no spouse, the spouse
cannot be located, or other circumstances that may be prescribed by Treasury
regulations. The waiver made by the Participant and the spouse may be revoked
by the Participant in writing without the consent of the spouse at any time.
Any new waiver must comply with the requirements of this paragraph. A
former spouse's waiver shall not be binding on a new spouse.
If a benefit is paid to the surviving spouse of a deceased Participant and
any part of such benefit is unpaid upon the death of the deceased Participant's
surviving spouse, such remaining benefit shall be paid to such person or trust
as is appointed by the deceased Participant's spouse, including his or her
estate.
In the event no valid designation of beneficiary exists at the time of the
Participant's death, the death benefit shall be payable to the Participant's
spouse, if any; if there is no spouse, or if the spouse cannot be located, the
death benefit shall be payable to the Participant's estate.
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(B) Beneficiary if Participant is not Married. If a Participant has no
-----------------------------------------
spouse, or the spouse cannot be located, or if the beneficiary designated is for
a period before the Plan Year beginning after December 31, 1984, then the
Participant may designate any person, trust, or entity as a beneficiary. Such
designation shall be made on a form satisfactory to the Plan Administrator. A
Participant may at any time revoke his or her designation of a beneficiary or
change the beneficiary by filing written notice of such revocation or change
with the Plan Administrator. If no valid designation of beneficiary exists at
the time of the Participant's death, the death benefit shall be payable to the
Participant's estate.
5.05 DISTRIBUTION IN THE EVENT OF DISABILITY. The Plan Administrator
shall direct the Trustee to distribute to a Participant his or her
nonforfeitable Accrued Benefits in the event the Participant becomes disabled.
The time and manner of payment shall be governed by Section 5.07. The payments
shall commence not later than one hundred twenty (120) days after the end of the
Plan Year in which the determination of Total and Permanent Disability is made.
"Total and Permanent Disability" means a physical or mental condition of a
Participant resulting from bodily injury, disease, or mental disorder which
renders such Participant incapable of continuing in the employment of the
Employer. The determination of Total and Permanent Disability of any
Participant shall be determined by the Employer in accordance with uniform
principles consistently applied upon the basis of such evidence as the Employer
deems necessary and desirable and such determination shall be communicated to
the Plan Administrator.
5.06 DISTRIBUTION IN THE EVENT OF TERMINATION OF EMPLOYMENT. A
Participant who terminates employment prior to the Normal Retirement Date (other
than as a result of death or disability) shall receive payment of his or her
nonforfeitable interest in the Plan at the time and in the manner specified in
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Section 5.07. However, if the adoption of this Plan amends an existing Plan,
nothing in this Agreement shall cause the Plan to retroactively reduce or
eliminate optional forms of benefits or any other Section 411(d)(6) protected
benefits, except as permitted pursuant to Treasury regulations.
5.07 TIME AND MANNER OF PAYMENT.
(A) The distribution of the nonforfeitable portion of a Participant's
Accrued Benefits shall not be deferred, unless the Participant elects in writing
to the Plan Administrator to defer receipt (though such an election may not
result in a death benefit that is more than incidental), beyond the sixtieth
(60th) day after the close of the Plan Year in which the latest of the following
events occur:
(1) The Participant attains Normal Retirement Age.
(2) The tenth (10th) anniversary of the year in which the Participant
commences participation in the Plan.
(3) The Participant terminates service with the Employer.
Notwithstanding any provision of this Plan to the contrary, distribution of
a Participant's benefits shall commence not later than April 1 of the calendar
year following the calendar year in which he or she attains age seventy and one-
half (70 1/2), except that for Participants who attained age seventy and one-
half (70 1/2) before January 1, 1988, distributions shall commence as follows:
(1) For Participants who are not five percent (5%) owners, not later
than April 1 of the calendar year following the later of (i) the calendar
year in which he or she attains age seventy and one-half (70 1/2), or (ii)
the calendar year in which the Participant retires.
(2) For Participants who are five percent (5%) owners, not later than
April 1 following the calendar
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year in which the Participant attains age seventy and one-half (70 1/2),
whether or not such Participant has terminated employment with the
Employer.
If distributions are made other than in a lump sum, distributions to a
Participant must begin no later than the April 1 following such calendar year
and must be made over the life of the Participant (or the lives of the
Participant and the Participant's designated beneficiary) or the life expectancy
of the Participant (or the life expectancies of the Participant and his or her
designated beneficiary). Such distributions shall be made in accordance with
the proposed regulations under Code Section 401(a)(9), including the minimum
distribution incidental benefit requirements of Section 1.401(a)(9)-2 of the
proposed regulations, unless and until such regulations are withdrawn or
superseded by subsequent regulations.
For the purposes of this Section, the life expectancy of a Participant and
a Participant's spouse (other than in the case of a life annuity) may, at the
election of the Participant or the Participant's spouse, be redetermined in
accordance with regulations. The election, once made, shall be irrevocable. If
no election is made by the time distributions must commence, then the life
expectancy of the Participant and the Participant's spouse shall not be subject
to recalculation. Life expectancy and joint and last survivor expectancy shall
be computed using the return multiples in Tables V and VI of Regulation Section
1.72-9.
In the event that the payment of benefits is not deferred as provided
herein, payment of benefits shall commence in accordance with Section 5.07, with
the manner of distribution to be in accordance with Section 5.07(B).
(B) The distribution shall be made in one or more of the following methods,
at the election of the Participant:
(1) A single lump sum payment.
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(2) There shall be no life annuity offered and any mode of
distribution selected will be such that the present value of the payments
to be made to the Participant is more than fifty percent (50%) of the
present value of the total payments to be made to the Participant and his
or her beneficiaries.
If the value of benefits payable under the Plan on the date benefits
commence is Three Thousand Five Hundred and No/100 Dollars ($3,500.00) or less
and has never exceeded Three Thousand Five Hundred and No/100 Dollars
($3,500.00), the Trustee shall distribute such amount in a single sum payment
without the consent of the Participant. If the value of benefits payable under
the Plan exceeds or has ever exceeded Three Thousand Five Hundred and No/100
Dollars ($3,500.00), a distribution may not be made without the Participant's
written consent. If the value of a Participant's vested account balance is zero
(0), the Participant shall be deemed to have received a distribution of such
vested account balance. A Participant's vested account balance shall not
include accumulated deductible employee contributions within the meaning of Code
Section 72(o)(5)(B) for Plan Years beginning prior to January 1, 1989.
(C) Distributions shall, subject to the limitations of this Section,
commence as soon as administratively feasible following the Participant's
separation from service. Notwithstanding the foregoing, distributions to
Participants who may be eligible for an additional allocation for the Plan Year
in which termination occurs shall not commence before such allocation is made.
(D) The amount of a Participant's distribution shall be determined as of
the Valuation Date immediately preceding the date of distribution.
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(E) Nothing in this Agreement shall cause the Plan to retroactively reduce
or eliminate optional forms of benefits or other Section 411(d)(6) protected
benefits, except as permitted pursuant to Treasury regulations.
(F) Upon termination of employment by a Participant for any reason
whatsoever and subject to the provisions of Section 5.07, if payment of the
vested portion of a Participant's benefits is made in other than a lump sum, the
Trustee, upon receipt of notice from the Plan Administrator of the Employee's
termination of employment, the reason for such termination, and the date the
Participant incurred a Break in Service (if applicable), may segregate the
aggregate vested amount of such Participant's account in a special account
invested separately from the general trust assets. Such segregated account
shall not share in any Employer Contribution except as may be authorized in
Section 3.04, and shall be charged or credited as appropriate with net earnings,
gains, losses and expenses as well as appreciation or depreciation in market
value during each Plan Year attributable to such account. The Trustee shall
have the same powers of investment and reinvestment with respect to a segregated
account as the Trustee has for all other assets of the trust. The Plan
Administrator shall notify the Trustee of each Participant's termination of
employment with the Employer not later than sixty (60) days after such
termination occurs.
Any person entitled to receive payments hereunder shall keep the Plan
Administrator advised of his or her address. If any payment is returned
unclaimed, the Plan Administrator shall send a registered letter to the last
address shown by its records of the individual entitled to payment stating such
individual's rights to such payment. If benefits are not claimed within one
(1) year of the date of such letter, the Trustee may deposit such amount in a
federally insured savings account in any financial institution located in the
Trustee's local metropolitan area, in trust for the individual, and upon such
deposit, the Trustee, Plan Administrator and Employer shall have no further
liability or responsibility for such funds.
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5.08 TRANSITIONAL RULE. The restrictions imposed by this Section shall
not apply if a Participant has, prior to January 1, 1984, made a written
designation to have his or her retirement benefit paid in an alternative method
acceptable under Code Section 401(a) as in effect prior to the enactment of the
Tax Equity and Fiscal Responsibility Act of 1982. Any such written designation
made by a Participant shall be binding upon the Plan Administrator
notwithstanding any contrary provision of this Article VI.
5.09 LIMITATION ON DISTRIBUTION DUE TO QUALIFIED DOMESTIC RELATIONS
ORDER. All rights and benefits, including elections, provided to a Participant
in this Plan shall be subject to the rights afforded to any "alternate payee"
under a "qualified domestic relations order" as those terms are defined in Code
Section 414(p).
A distribution made to an alternate payee pursuant to a qualified domestic
relations order may be made without regard to the age or employment status of
the Participant to whose benefits the order applies.
5.10 WITHDRAWAL FOR SERIOUS FINANCIAL HARDSHIP. A Participant, upon
written application to the Plan Administrator, may request an emergency
distribution from his or her Participant's Combined Account due to the
occurrence of events which will inflict serious financial hardship on a
Participant. Such serious financial hardship must be shown by positive evidence
submitted to the Plan Administrator and must be of sufficient magnitude to
impair the Participant's financial security. The distribution shall not be less
than One Thousand and No/100 Dollars ($1,000.00) and shall not exceed the
Participant's interest in his or her Participant's Combined Account. The
distribution shall not exceed the amount of the immediate and heavy financial
need of the Participant (including amounts necessary to pay any federal, state
or local income taxes or any withholding or penalties reasonably anticipated to
result
72.
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from the distribution). Prior to becoming eligible for a hardship distribution,
the Participant must have obtained all distributions for which he or she is
eligible other than hardship distributions, and all non-taxable loans currently
available under this or any other plan maintained by the Employer. Withdrawals
shall be determined in a consistent and nondiscriminatory manner, and shall not
affect the Participant's right under the Plan to make additional withdrawals or
continue to be an active Participant. Notwithstanding the foregoing, any
Participant who is granted a hardship distribution shall have his or her right
to make savings and employee contributions suspended, beginning with the payroll
period following receipt of the hardship distribution and ending on the first
Election Date twelve (12) or more months thereafter, under this Plan and all
other qualified and nonqualified plans of deferred compensation maintained by
the Employer. Further, during the calendar year following the hardship
distribution, the savings contributions of such a Participant shall be limited
to the excess of the applicable limit under Code Section 402(g) for that
calendar year over the amount of the Participant's savings contributions for the
calendar year of the hardship distribution. Withdrawals made pursuant to this
Section may not be repaid.
For purposes of this Section, hardship shall include financial need due to:
(1) Expenses for medical care described in Code Section 213(d)
previously incurred by the Employee, the Employee's spouse, or any
dependents of the Employee (as defined in Code Section 152) or necessary
for these persons to obtain medical care described in Code Section 213(d);
(2) Costs directly related to the purchase of a principal residence
for the Employee (excluding mortgage payments);
(3) Payment of tuition and related educational expenses for the next
twelve (12) months of post-secondary education for the Employee or the
Employee's
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spouse, children or other dependents (as defined in Code Section 152);
(4) Payments necessary to prevent the eviction of the Employee from
his or her principal residence or foreclosure on the mortgage on such
residence;
(5) Costs of any other financial need previously announced by the
Commissioner as constituting a deemed immediate and heavy financial need.
ARTICLE VI.
DISTRIBUTIONS OF BENEFITS ACCRUED PRIOR TO JANUARY 1, 1995
6.01 RETIREMENT. Every Participant may, upon reasonable notice to the
Employer, retire for the purposes of this Plan on his or her Normal Retirement
Date. If a Participant continues in the employment of the Employer after his or
her Normal Retirement Date, such Participant shall continue to be treated in all
respects as a Participant until actual retirement. Upon such actual
retirement, participation hereunder shall cease. The Employer, in accordance
with the provisions of Section 6.07 shall direct the Trustee to distribute such
Participant's Accrued Benefit to the Participant. The distribution of a
Participant's accrued benefit upon early retirement, normal retirement or actual
retirement after normal retirement shall, subject to Section 6.07, commence not
later than one hundred twenty (120) days after the last day of the Plan Year in
which such retirement occurs.
A Participant who continues in the employment of the Employer after his or
her Normal Retirement Date may, at the election of the Participant, take a
distribution of all or part of his or her account balance notwithstanding that
such Participant has not separated from service.
74.
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6.02 DETERMINATION OF BENEFITS UPON DEATH.
(A) Upon the death of a Participant before retirement or other termination
of employment, and within one hundred twenty (120) days after the end of the
Plan Year in which proof of death is received, the Plan Administrator shall
direct the Trustee, in accordance with the provisions of Section 6.03, to
distribute the value of the deceased Participant's account to the Participant's
beneficiary.
(B) Unless otherwise elected in the manner prescribed in Section 6.03, the
beneficiary of the death benefit shall be the Participant's spouse, who shall
receive such benefit in the form of a preretirement survivor annuity pursuant to
Section 6.03. Except, however, the Participant may designate a beneficiary other
than the spouse if:
(1) The Participant and spouse have validly waived the preretirement
survivor annuity in the manner prescribed in Section 6.03, and the spouse
has waived his or her right to be the Participant's beneficiary;
(2) The Participant has no spouse; or
(3) The spouse cannot be located.
In such event, the designation of a beneficiary shall be made on a form
satisfactory to the Plan Administrator. A Participant may at any time revoke
his or her designation of a beneficiary or change the beneficiary by filing
written notice of such revocation or change with the Plan Administrator.
However, the Participant's spouse must again consent in writing to any change or
revocation which results in the naming of a nonspouse beneficiary. In the event
no valid designation of beneficiary exists at the time of the Participant's
death, the death benefit shall be payable to the Participant's spouse, if any;
if there is no spouse, or if the spouse cannot be located, the death benefit
shall be payable to the Participant's estate. In the event no valid designation
of beneficiary exists at the time of the Participant's death, the death benefit
shall be payable to the Participant's spouse, if any; if there is no spouse, or
if the
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spouse cannot be located, the death benefit shall be payable to the
Participant's estate.
6.03 DISTRIBUTION OF BENEFITS UPON DEATH.
(A) Unless otherwise elected as provided below, a Participant who dies
before the annuity starting date and who has a surviving spouse shall have the
death benefit paid to his or her surviving spouse in the form of a preretirement
survivor annuity. The surviving spouse may direct that payment commence within
a reasonable time after the Participant's death. If the surviving spouse does
not so direct, payment of such benefits must commence by the date the
Participant would have attained Normal Retirement Age under the Plan, unless the
surviving spouse elects a later date.
(B) Any election to waive the preretirement survivor annuity before the
Participant's death must be made by the Participant in writing during the
election period and shall require the spouse's irrevocable consent in the same
manner provided for in Section 6.07(B)(2). Further, the spouse's consent must
acknowledge the specific nonspouse beneficiary.
(C) The election period to waive the preretirement survivor annuity shall
begin on the first day of the Plan Year in which the Participant attains age
thirty-five (35) and end on the date of the Participant's death. In the event a
vested Participant separates from service prior to the beginning of the election
period, the election period shall begin on the date of such separation from
service.
(D) With regard to the election, the Plan Administrator shall provide each
Participant within the period beginning with the first day of the Plan Year in
which the Participant attains age thirty-two (32) and ending with the close of
the Plan Year preceding the Plan Year in which the Participant attains age
thirty-five (35), a written explanation of the preretirement survivor annuity
containing comparable information to that required pursuant to Section
6.07(B)(5). If the Participant enters the Plan or if the qualified survivor
annuity requirements
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first apply to the Participant after the first day of the Plan Year in which the
Participant has attained age thirty-four (34), the Plan Administrator shall
provide notice during the one-year period following the entry of the Participant
into the Plan or the date the qualified preretirement survivor annuity
requirements first apply to the Participant. In the case of a Participant's
separation from service before age thirty-five (35), such explanation shall be
provided within one (1) year after separation.
(E) The preretirement survivor annuity provided for in this Section shall
apply only to Participants who are credited with an Hour of Service on or after
August 23, 1984. Former Participants who are not credited with an Hour of
Service on or after August 23, 1984 shall be provided with rights to the
preretirement survivor annuity in accordance with Section 303(e)(2) of the
Retirement Equity Act of 1984.
(F) If the value of the preretirement survivor annuity has never exceeded
Three Thousand Five Hundred and No/100 Dollars ($3,500.00), the Plan
Administrator shall direct the immediate distribution of such amount to the
Participant's spouse. No distribution may be made under the preceding sentence
after the annuity starting date unless the spouse consents in writing. If the
value exceeds, or has ever exceeded, Three Thousand Five Hundred and No/100
Dollars ($3,500.00), an immediate distribution of the entire amount may be made
to the surviving spouse, provided such spouse consents in writing to such
distribution.
(G)(1) In the event the death benefit is not paid in the form of a
preretirement survivor annuity, it shall be paid to the Participant's designated
beneficiary by either of the following methods, as elected by the beneficiary.
(i) One lump-sum payment; or
(ii) Payment in monthly, quarterly, semi-annual, or annual cash
installments over a period not to exceed the life expectancy of the
designated beneficiary, and in installments as nearly equal as practicable.
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(2) In the event the death benefit payable pursuant to Section 6.02 is
payable in installments, then, upon the death of the Participant, the Trustee
shall continue to invest the Participant's account as directed by the
Participant under Section 3.17, until further investment directions are provided
by the beneficiary.
(H) If the distribution of a Participant's interest has begun in accordance
with a method selected in Section 6.07(C) and the Participant dies before his or
her entire interest has been distributed, the remaining portion of such interest
shall be distributed at least as rapidly as under the method of distribution
selected pursuant to Section 6.07(C) as of the date of death.
(I) If a Participant dies before beginning to receive any distributions of
his or her interest under the Plan, the entire interest shall be distributed to
his or her beneficiaries within five (5) years after the death of the
Participant.
(J) The five (5) year distribution requirement of Section 6.03(I) shall not
apply to any portion of the deceased Participant's interest which is payable to
or for the benefit of a designated beneficiary. In such event, such portion may
be distributed over the life of such designated beneficiary (or over a period
not extending beyond the life expectancy of such designated beneficiary)
provided such distribution begins not later than one (1) year after the date of
the Participant's death (or such later date as may be prescribed by Treasury
regulations).
Except, however, in the event the Participant's spouse is the beneficiary,
the requirement that distributions commence within one (1) year of a
Participant's death shall not apply. In lieu thereof, such distribution must
commence no later than the date on which the deceased Participant would have
attained age seventy and one-half (70 1/2). If the surviving spouse dies before
the distributions to such spouse begin, then the five (5) year distribution
requirement of Section 6.03(I) shall apply as if the spouse were the
Participant.
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(K) For the purposes of this Section, the life expectancy of a Participant
and a Participant's spouse (other than in the case of a life annuity) may, at
the election of the Participant or the Participant's spouse, be redetermined in
accordance with regulations. The election, once made, shall be irrevocable. If
no election is made by the time distributions must commence, then the life
expectancy of the Participant and the Participant's spouse shall not be subject
to recalculation. Life expectancy and joint and last survivor expectancy shall
be computed using the return multiples in Tables V and VI of Regulation Section
1.72-9.
(L) The restrictions imposed by this Section shall not apply if a
Participant has, prior to January 1, 1984, made a written designation to have
his or her death benefits paid in an alternative method acceptable under Code
Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal
Responsibility Act of 1982. Any such written designation made by a Participant
shall be binding upon the Plan Administrator notwithstanding the provisions of
this Section, subject to the consent of the Participant's spouse in the same
manner as provided in Section 6.07(B)(2).
(M) If a benefit is paid to the surviving spouse of a deceased Participant
and any part of such benefit is unpaid upon the death of the deceased
Participant's surviving spouse, such remaining benefit shall be paid to such
person or trust as is appointed by the deceased Participant's spouse, including
his or her estate.
6.04 PROOF OF DEATH. The Plan Administrator may require such proper
proof of death and such evidence of the right of any person to receive payment
of the value of the account of a deceased Participant or former Participant as
the Plan Administrator may deem desirable. The Plan Administrator's
determination of death and of the right of any person to receive payment shall
be conclusive, subject to the claim procedure of Sections 9.01 and 9.02.
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6.05 DETERMINATION OF BENEFITS IN THE EVENT OF DISABILITY. The Plan
Administrator shall direct the Trustee to distribute to a Participant his or her
entire accrued benefits in the event the Participant becomes disabled. The time
and manner of payment shall be governed by Section 6.07. The payments shall
commence not later than one hundred twenty (120) days after the end of the Plan
Year in which the determination of Total and Permanent Disability is made,
unless a later distribution is elected by the Participant. "Total and Permanent
Disability" means a physical or mental condition of a Participant resulting from
bodily injury, disease, or mental disorder which renders him incapable of
continuing in the employment of the Employer. The determination of Total and
Permanent Disability of any Participant shall be determined by the Employer in
accordance with uniform principles consistently applied upon the basis of such
evidence as the Employer deems necessary and desirable and such determination
shall be communicated to the Plan Administrator.
6.06 DETERMINATION OF BENEFITS UPON TERMINATION.
Upon the Participant's termination of employment, the Trustee shall
continue to invest the amounts in the Participant's accounts pursuant to
Sections 8.04 or 3.17, as applicable, until distribution in accordance with
Section 6.07.
6.07 TIME AND MANNER OF PAYMENT.
(A) The distribution of the nonforfeitable portion of a Participant's
accrued benefits shall not be deferred, unless the Participant elects in writing
to the Plan Administrator to defer receipt (though such an election may not
result in a death benefit that is more than incidental), beyond the sixtieth
(60th) day after the close of the Plan Year in which the latest of the following
events occur:
(1) The Participant attains Normal Retirement Age.
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(2) The tenth (10th) anniversary of the year in which the Participant
commences participation in the Plan.
(3) The Participant terminates service with the Employer.
Notwithstanding any provision of this Plan to the contrary, distribution of
a Participant's benefits shall commence not later than April 1 of the calendar
year following the calendar year in which he or she attains age seventy and one-
half (70 1/2), except that for Participants who attained age seventy and one-
half (70 1/2) before January 1, 1988, distributions shall commence as follows:
(1) For Participants who are not five percent (5%) owners, not later
than April 1 of the calendar year following the later of (i) the calendar
year in which he or she attains age seventy and one-half (70 1/2), or (ii)
the calendar year in which the Participant retires.
(2) For Participants who are five percent (5%) owners, not later than
April 1 following the calendar year in which the Participant attains age
seventy and one-half (70 1/2), whether or not such Participant has
terminated employment with the Employer.
If distributions are made other than in a lump sum, distributions to a
Participant must begin no later than the April 1 following such calendar year
and must be made over the life of the Participant (or the lives of the
Participant and the Participant's designated beneficiary) or the life expectancy
of the Participant (or the life expectancies of the Participant and his or her
designated beneficiary). Such distributions shall be made in accordance with
the proposed regulations under Code Section 401(a)(9), including the minimum
distribution incidental benefit requirements of Section 1.401(a)(9)-2 of the
proposed regulations, unless and until such regulations are withdrawn or
superseded by subsequent regulations.
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For the purposes of this Section, the life expectancy of a Participant and
a Participant's spouse (other than in the case of a life annuity) may, at the
election of the Participant or the Participant's spouse, be redetermined in
accordance with regulations. The election, once made, shall be irrevocable. If
no election is made by the time distributions must commence, then the life
expectancy of the Participant and the Participant's spouse shall not be subject
to recalculation. Life expectancy and joint and last survivor expectancy shall
be computed using the return multiples in Tables V and VI of Regulation Section
1.72-9.
In the event that the payment of benefits is not deferred as provided
herein, payment of benefits shall commence in accordance with Section 6.07, with
the time and manner of distribution to be in accordance with Section 6.07(C).
(B)(1) Unless otherwise elected as provided below, a Participant who is
married on and does not die before the "annuity starting date" shall receive the
value of his or her benefits in the form of a joint and survivor annuity. The
joint and survivor annuity shall be equal in value to a single life annuity.
Such joint and survivor benefits following the Participant's death shall
continue to the spouse during the spouse's lifetime at a rate equal to fifty
percent (50%) of the rate at which such benefits were payable to the
Participant. The Participant may elect to receive a smaller annuity benefit
with continuation of payments to the spouse at a rate of seventy-five percent
(75%) or one hundred percent (100%) of the rate payable to a Participant during
his or her lifetime. An unmarried Participant shall receive the value of his or
her benefit in the form of a life annuity. Such unmarried Participant, however,
may elect in writing to waive the life annuity. The election must comply with
the provisions of this Section as if it were an election to waive the joint and
survivor annuity by a married Participant, but without the spousal consent
requirement. The joint and survivor annuity and the life annuity form of
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distribution shall be the actuarial equivalent of the benefits due the
Participant.
(2) Any election to waive the joint and survivor annuity must be made by
the Participant in writing during the election period and the Participant's
spouse must consent to such waiver, to the specific optional form of benefit,
and to the specific alternate beneficiary, if any. Such spouse's consent shall
be irrevocable and must acknowledge the effect of such election and be witnessed
by a Plan representative or a notary public. Such consent shall not be required
if it is established to the satisfaction of the Plan Administrator that the
required consent cannot be obtained because there is no spouse, the spouse
cannot be located, or other circumstances that may be prescribed by Treasury
regulations. The election made by the Participant and consented to by the
spouse may be revoked by the Participant in writing without the consent of the
spouse at any time during the election period. The number of revocations shall
not be limited. Any new election must comply with the requirements of this
paragraph. A former spouse's waiver shall not be binding on a new spouse.
(3) The election period to waive the joint and survivor annuity shall be
the ninety (90) day period ending on the "annuity starting date".
(4) For purposes of this Section, the "annuity starting date" means the
first day of the first period for which an amount is payable as an annuity
(whether by reason of retirement or disability), or, in the case of a benefit
not payable in the form of an annuity, the first day on which all events have
occurred which entitle the Participant to benefits.
(5) With regard to the election, the Plan Administrator shall provide the
Participant within a reasonable period of time before the "annuity starting
date" (and consistent with Treasury regulations), a written explanation of:
(a) The terms and conditions of the joint and survivor annuity;
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(b) The Participant's right to make an election to waive the joint and
survivor annuity;
(c) The right of the Participant's spouse to consent to any election
to waive the joint and survivor annuity; and
(d) The right of the Participant to revoke such election, and the
effect of such revocation.
(C) In the event a married Participant duly elects pursuant to paragraph
(B)(2) above not to receive the retirement benefit in the form of a joint and
survivor annuity or, if such Participant is not married, in the form of a life
annuity, the Plan Administrator, at the election of the Participant and with the
consent of the Participant's spouse, if any, shall direct the Trustee to
distribute to a Participant any amount to which the Participant is entitled
under the Plan in one or more of the following methods:
(1) A single lump sum payment; or
(2) Payments in monthly, quarterly, semi-annual, or annual
installments or other payments continuing over a period of time not to
exceed the Participant's life expectancy (or the joint life expectancies of
the Participant and his or her designated Beneficiary).
(D) Distributions shall commence, subject to the limitations provided in
this Section, as soon as administratively feasible following the Participant's
separation from service.
(E) A Participant's vested benefit derived from Employer and Employee
Contributions may not be paid without the Participant's written consent if the
value exceeds, or has ever exceeded, Three Thousand Five Hundred and No/100
Dollars ($3,500.00). Further, the spouse of a Participant must consent in
writing to any such distribution. Written consent of the Participant and the
Participant's spouse to the distribution must be obtained not more than ninety
(90) days before commencement of the distribution. If the value of the
Participant's vested benefit derived from Employer and Employee contributions is
Three Thousand Five Hundred and No/100 dollars ($3,500.00) or less, and
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has never exceeded Three Thousand Five Hundred and No/100 Dollars ($3,500.00),
the Plan Administrator shall distribute such benefit without such Participant's
consent. No distribution may be made under the preceding sentence after the
annuity starting date unless the Participant and the Participant's spouse
consent in writing to such distribution. If the value of an Employee's vested
account balance is zero (0), the Employee shall be deemed to have received a
distribution of such vested account balance. A Participant's vested account
balance shall not include accumulated deductible employee contributions within
the meaning of Section 72(o)(5)(B) of the Code for Plan Years beginning prior to
January 1, 1989.
(F) The amount of a Participant's distribution shall be determined as of
the Valuation Date immediately preceding the date of distribution.
(G) Nothing in this Agreement shall cause the Plan to retroactively reduce
or eliminate optional forms of benefits or other Section 411(d)(6) protected
benefits, except as permitted pursuant to Treasury regulations.
(H) Upon termination of employment by a Participant for any reason
whatsoever and subject to the provisions of Section 6.07, if payment of the
vested portion of a Participant's benefits is made in other than a lump sum, the
Trustee, upon receipt of notice from the Plan Administrator of the Employee's
termination of employment, the reason for such termination, and the date the
Participant incurred a Break in Service (if applicable), may segregate the
aggregate vested amount of such Participant's account in a special account
invested separately from the general trust assets. Such segregated account
shall not share in any Employer Contribution except as may be authorized in
Section 3.04, and shall be charged or credited as appropriate with net earnings,
gains, losses and expenses, as well as appreciation or depreciation in market
value during each Plan Year attributable to such account. The Trustee shall
have the same powers of investment and reinvestment with respect to a segregated
account as the Trustee has for all other assets of the trust. The Plan
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Administrator shall notify the Trustee of each Participant's termination of
employment with the Employer not later than sixty (60) days after such
termination occurs.
(I) Any person entitled to receive payments hereunder shall keep the Plan
Administrator advised of his or her address. If any payment is returned
unclaimed, the Plan Administrator shall send a registered letter to the last
address shown by its records of the individual entitled to payment stating such
individual's rights to such payment. If benefits are not claimed within one
(1) year of the date of such letter, the Trustee may deposit such amount in a
federally insured savings account in any financial institution located in the
Trustee's local metropolitan area, in trust for the individual, and upon such
deposit, the Trustee, Plan Administrator and Employer shall have no further
liability or responsibility for such funds.
(J) If a Participant's retirement benefit shall be distributed to the
Participant and the Participant's beneficiaries over a period in excess of the
Participant's then life expectancy, the then present value of the payments to be
made over the period of the Participant's then life expectancy must be more than
fifty percent (50%) of the then present value of the total payments to be made
to the Participant and the beneficiaries.
Except, however, this paragraph shall not apply to a distribution in the
form of a joint and survivor annuity.
6.08 TRANSITIONAL RULE. The restrictions imposed by this Section shall
not apply if a Participant has, prior to January 1, 1984, made a written
designation to have his or her retirement benefit paid in an alternative method
acceptable under Code Section 401(a) as in effect prior to the enactment of the
Tax Equity and Fiscal Responsibility Act of 1982. Any such written designation
made by a Participant shall be binding upon the Plan Administrator
notwithstanding any contrary provision of this Article VI, subject to the
consent of the Participant's spouse in the same manner as provided in Section
6.07(B)(2).
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6.09 LIMITATION ON DISTRIBUTION DUE TO QUALIFIED DOMESTIC RELATIONS
ORDER. All rights and benefits, including elections, provided to a Participant
in this Plan shall be subject to the rights afforded to any "alternate payee"
under a "qualified domestic relations order" as those terms are defined in Code
Section 414(p).
A distribution made to an alternate payee pursuant to a qualified domestic
relations order may be made without regard to the age or employment status of
the Participant to whose benefits the order applies.
6.10 WITHDRAWAL FOR SERIOUS FINANCIAL HARDSHIP. A Participant, upon
written application to the Plan Administrator, may request an emergency
distribution from his or her Participant's Combined Account due to the
occurrence of events which will inflict serious financial hardship on a
Participant. Such serious financial hardship must be shown by positive evidence
submitted to the Plan Administrator and must be of sufficient magnitude to
impair the Participant's financial security. The distribution shall not be less
than One Thousand and No/100 Dollars ($1,000.00) and shall not exceed the
Participant's interest in his or her Participant's Combined Account. The
distribution shall not exceed the amount of the immediate and heavy financial
need of the Participant (including amounts necessary to pay any federal state or
local income taxes or any withholding or penalties reasonably anticipated to
result from the distribution). Prior to becoming eligible for a hardship
distribution, the Participant must have obtained all distributions for which he
or she is eligible other than hardship distributions, and all non-taxable loans
currently available under this or any other plan maintained by the Employer.
Withdrawals shall be determined in a consistent and nondiscriminatory manner,
and shall not affect the Participant's right under the Plan to make additional
withdrawals or continue to be an active Participant. Notwithstanding the
foregoing, any Participant who is granted a hardship distribution shall have
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his or her right to make savings and employee contributions suspended, beginning
with the payroll period following receipt of the hardship distribution and
ending on the first Election Date twelve (12) or more months thereafter, under
this Plan and all other qualified and nonqualified plans of deferred
compensation maintained by the Employer. Further, during the calendar year
following the hardship distribution, the savings contributions of such a
Participant shall be limited to the excess of the applicable limit under Code
Section 402(g) for that calendar year over the amount of the Participant's
savings contributions for the calendar year of the hardship distribution.
Withdrawals made pursuant to this Section may not be repaid.
For purposes of this Section, hardship shall include financial need due to:
(1) Expenses for medical care described in Code Section 213(d)
previously incurred by the Employee, the Employee's spouse, or any
dependents of the Employee (as defined in Code Section 152) or necessary
for these persons to obtain medical care described in Code Section 213(d);
(2) Costs directly related to the purchase of a principal residence
for the Employee (excluding mortgage payments);
(3) Payment of tuition and related educational expenses for the next
twelve (12) months of post-secondary education for the Employee or the
Employee's spouse, children or other dependents (as defined in Code Section
152);
(4) Payments necessary to prevent the eviction of the Employee from
his or her principal residence or foreclosure on the mortgage on such
residence;
(5) Costs of any other financial need previously announced by the
Commissioner as constituting a deemed immediate and heavy financial need.
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ARTICLE VII.
TOP HEAVY PROVISIONS
7.01 TOP HEAVY PLAN REQUIREMENTS. For any Top Heavy Plan Year, the Plan
shall provide special minimum allocations required under Code Section 416(c)
pursuant to Section 3.04 of the Plan. In addition, for any Top Heavy Plan Year
beginning prior to January 1, 1989, Compensation in excess of Two Hundred
Thousand Dollars ($200,000.00) shall not be taken into account.
7.02 DETERMINATION OF TOP HEAVY STATUS.
(A) This Plan shall be a Top Heavy Plan for any Plan Year commencing after
December 31, 1983, if, as of the Determination Date, (1) the present value of
Accrued Benefits of Key Employees, and (2) the sum of the Aggregate Accounts of
Key Employees under this plan and all plans of an Aggregation Group, exceeds
sixty percent (60%) of the present value of Accrued Benefits and the Aggregate
Accounts of all Participants under this Plan and all plans of an Aggregation
Group.
If any Participant is a Non-Key Employee for any Plan Year, but such
Participant was a Key Employee for any prior Plan Year, such Participant's
present value of Accrued Benefit and/or Aggregate Account balance shall not be
taken into account for purposes of determining whether this Plan is a Top Heavy
Plan (or whether any Aggregation Group which includes this Plan is a Top Heavy
Group). In addition, for Plan Years beginning after December 31, 1984, if a
Participant or former Participant has not performed services for any Employer
maintaining the Plan (other than benefits under the Plan) at any time during the
five (5) year period ending on the Determination Date, the Aggregate Account
and/or present value of Accrued Benefit for such Participant or former
Participant shall not be taken into account for the purposes of determining
whether this Plan is a Top Heavy Plan.
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(B) This Plan shall be a Super Top Heavy Plan for any Plan Year commencing
after December 31, 1983, if, as of the Determination Date, (1) the present value
of Accrued Benefits of Key Employees, and (2) the sum of the Aggregate Accounts
of Key Employees under this Plan and all plans of an Aggregation Group, exceeds
ninety percent (90%) of the present value of Accrued Benefits or the Aggregate
Accounts of all Participants under this Plan and all plans of an Aggregation
Group.
(C) Aggregate Account: A Participant's Aggregate Account as of the
Determination Date is the sum of:
(1) The Participant's account balance as of the most recent valuation
occurring within a twelve (12) month period ending on the Determination
Date.
(2) An adjustment for any contributions due as of the Determination
Date. Such adjustment shall be the amount of any contributions actually
made after the Valuation Date but before the Determination Date, except for
the first Plan Year when such adjustment shall also reflect the amount of
any contributions made after the Determination Date that are allocated as
of a date in that first Plan Year.
(3) Any Plan distributions made within the Plan Year that includes the
Determination Date or within the four (4) preceding Plan Years. However,
in the case of distributions made after the Valuation Date and prior to the
Determination Date, such distributions are not included as distributions
for top heavy purposes to the extent that such distributions are already
included in the Participant's Aggregate Account balance as of the Valuation
Date. Notwithstanding anything herein to the contrary, all distributions,
including distributions made prior to January 1, 1984, and distributions
under a terminated plan which, if it had not been terminated would have
been required to be included in an Aggregation Group, will be counted.
Further, distributions from the Plan (including the
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cash value of life insurance policies) of a Participant's account balance
because of death shall be treated as a distribution for purposes of this
paragraph.
(4) Any voluntary Employee contributions. However, amounts
attributable to tax deductible qualified deductible employee contributions
shall not be considered to be a part of the Participant's Aggregate Account
balance.
(5) With respect to unrelated rollovers and plan-to-plan transfers
(ones which are both initiated by the Employee and made from a plan
maintained by one employer to a plan maintained by another employer), if
this Plan provides for rollovers or plan-to-plan transfers it shall always
consider such rollover or plan-to-plan transfer as a distribution for the
purposes of this Section. If this Plan is the plan accepting such
rollovers or plan-to-plan transfers, it shall not consider such rollovers
or plan-to-plan transfers accepted after December 31, 1983 as part of the
Participant's Aggregate Account balance. However, rollovers or plan-to-
plan transfers accepted prior to January 1, 1984 shall be considered as
part of the Participant's Aggregate Account balance.
(6) With respect to related rollovers and plan-to-plan transfers (ones
either not initiated by the Employee or made to a plan maintained by the
same employer), if this Plan provides the rollover or plan-to-plan
transfer, it shall not be counted as a distribution for purposes of this
Section. If this Plan is the plan accepting such rollover or plan-to-plan
transfer, it shall consider such rollover or plan-to-plan transfer as part
of the Participant's Aggregate Account balance, irrespective of the date on
which such rollover or plan-to-plan transfer is accepted.
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(7) For the purposes of determining whether two employers are to be
treated as the same employer in paragraphs (5) and (6) above, all employers
aggregated under Code Sections 414(b), (c) or (m) are treated as the same
employer.
(D) "Aggregation Group" means either a Required Aggregation Group or a
Permissive Aggregation Group as hereinafter determined.
(1) Required Aggregation Group: In determining a Required Aggregation
Group hereunder, each plan of the Employer in which a Key Employee is a
Participant in the Plan Year containing the Determination Date or any of
the four preceding Plan Years, and each other plan of the Employer which
enables any plan in which a Key Employee participates to meet the
requirements of Code Sections 401(a)(4) or 410, will be required to be
aggregated. Such group shall be known as a Required Aggregation Group.
In the case of a Required Aggregation Group, each plan in the group
will be considered a Top Heavy Plan if the Required Aggregation Group is a
Top Heavy Group. No plan in the Required Aggregation Group will be
considered a Top Heavy Plan if the Required Aggregation Group is not a Top
Heavy Group.
(2) Permissive Aggregation Group: The Employer may also include any
other plan not required to be included in the Required Aggregation Group,
provided the resulting group, taken as a whole, would continue to satisfy
the provisions of Code Sections 401(a)(4) or 410. Such group shall be
known as a Permissive Aggregation Group.
In the case of a Permissive Aggregation Group, only a plan that is
part of the Required Aggregation Group will be considered a Top Heavy Plan
if the Permissive Aggregation Group is a Top Heavy Group. No plan in the
Permissive Aggregation Group will be
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considered a Top Heavy Plan if the Permissive Aggregation Group is not a
Top Heavy Group.
(3) Only those plans of the Employer in which the Determination Dates
fall within the same calendar year shall be aggregated in order to
determine whether such plans are Top Heavy Plans.
(4) An Aggregation Group shall include any terminated plan of the
Employer if it was maintained within the last five (5) years ending on the
Determination Date.
(E) "Determination Date" means (a) the last day of the preceding Plan Year,
or (b) in the case of the first Plan Year, the last day of such Plan Year.
(F) Present Value of Accrued Benefit: In the case of a defined benefit
plan, a Participant's present value of Accrued Benefit shall be as determined
under the provisions of the applicable defined benefit plan.
(G) "Top Heavy Group" means an Aggregation Group in which, as of the
Determination Date, the sum of:
(1) The present value of Accrued Benefits of Key Employees under all
defined benefit plans included in the group, and
(2) The Aggregate Accounts of Key Employees under all defined
contribution plans included in the group, exceeds sixty percent (60%) of a
similar sum determined for all Participants.
(H) "Top Heavy Plan Year" means that, for a particular Plan Year commencing
after December 31, 1983, the Plan is a Top Heavy Plan.
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ARTICLE VIII.
TRUST FUND AND TRUSTEE
8.01 ESTABLISHMENT AND ACCEPTANCE OF TRUST. The Employer hereby
establishes with the Trustee a trust which will comprise the payments heretofore
transferred by the Employer to the Trustee, together with such other payments as
shall from time to time be made to the Trustee by or on behalf of the Employer.
Such prior payments and such subsequent payments and accruals thereto from time
to time held by the Trustee are herein called the Trust Fund. The Trustee
hereby accepts the trust created hereunder and agrees to perform the Trustee's
duties under this Agreement. The Trust Fund shall be held by the Trustee in
trust hereunder and shall be invested and applied by the Trustee as hereunder
provided.
8.02 RESPONSIBILITIES. The responsibilities for the administration of
this Trust shall be allocated between the Trustee and the Plan Administrator as
they from time to time mutually agree, except that the Trustee shall retain all
responsibility and authority to manage, control, and invest assets of the Trust.
The Trustee and Plan Administrator may allocate their divided responsibilities
of administration and management to such other agents as they may from time to
time designate by filing a written statement appointing such person or persons
with the Trustee.
8.03 APPOINTMENT. A written designation appointing an individual or
individuals as provided by Section 8.02 above shall contain the name of the
person or persons appointed, a description of the responsibilities appointed to
them, and their signed acceptance of such responsibilities.
8.04 POWERS OF TRUSTEE. Except as limited herein, the Trustee shall have
the following powers and authority in the
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administration of the Trust Fund, all of which powers shall be exercised with
care, skill, prudence, and diligence under the circumstances then prevailing
that a prudent person would use and for the exclusive benefit of the Plan's
Participants and beneficiaries:
(1) To purchase any securities or other property of any nature, be it
realty or personalty, tangible or intangible, and to retain the same in
trust.
(2) To sell, exchange, convey, transfer, or otherwise dispose of, and
also to grant options with respect to, any securities or other property
held by the Trustee by private contract or at public auction. Any sale may
be made for cash or upon credit, or partly in cash and partly on credit.
No person dealing with the Trustee shall be bound to see to the
applications of the purchase money or to inquire into the validity or
propriety of any such sale or other disposition.
(3) To vote upon any stocks, bonds, or other securities; to give
general or special proxies or powers of attorney with or without power of
substitution; to exercise any conversion privileges, subscription rights,
or other options and to make any payments incidental thereto; to oppose, or
to consent to, or otherwise participate in, corporate reorganizations or
other changes affecting corporate securities, and to delegate discretionary
powers, and to pay any assessments or charges in connection therewith; and
generally to exercise any of the powers of an owner with respect to stocks,
bonds, securities, or other property held as part of the Trust Fund.
(4) To cause any securities or other property held as part of the
Trust Fund to be registered in the Trustee's name or in the name of a
nominee without designating the same as trust property, and to hold any
investments in bearer form; however, the books and records of the Trustee
shall at all times show that all
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such investments are part of the Trust Fund. Any such registration or
holding by the Trustee shall not relieve the Trustee from responsibility
for the sale, custody, and disposition of the Trust Fund in accordance with
the terms and provisions of this Agreement.
(5) To borrow or raise money for the purposes of the trust in such
amount, and upon such terms and conditions, as the Trustee shall deem
advisable; and, for any sum so borrowed to issue its promissory note as
Trustee, and to secure the repayment thereof by pledging all, or any part,
of the Trust Fund; and no person lending money to the Trustee shall be
bound to see to the application of the money lent or to inquire into the
validity or propriety of any such borrowing.
(6) To keep, from time to time, such portion of the Trust Fund in cash
or cash balances as the Trustee may deem to be in the best interests of the
Trust created hereby, without liability for interest thereon. Cash received
or held by the Trustee under any of the provisions hereof may be deposited
by the Trustee in a commercial bank, under such provisions with respect to
interest as may be permitted by law, and such Trustee shall have the right
to utilize the investment division of a commercial bank to purchase
obligations of the U.S. Government or its agencies, commercial paper,
certificates of deposit, or similar instruments. In the event a Trustee
hereunder is a bank, division, department, or subsidiary thereof, such
Trustee may deposit trust funds with and utilize the banking facilities and
ancillary services of itself or its related bank entity.
(7) To accept and retain for such time as the Trustee deems advisable
any securities or other property received or acquired by the Trustee
hereunder,
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whether or not such securities or other property would normally be
purchased as investments hereunder.
(8) To make, execute, acknowledge, and deliver any and all documents
or transfer and conveyance including but not limited to deeds, leases,
mortgages, conveyances, contracts, waivers, and releases and any and all
other instruments that may be necessary or appropriate to carry out the
powers herein granted.
(9) To settle, compromise, or submit to arbitration any claims, debts,
or damages owing to or from the Trust Fund, to commence or defend suits or
legal or administrative proceedings, and to represent the Trust Fund in all
suits and legal and administrative proceedings. To renew or extend or
participate in the renewal or extension of any mortgage or other loans,
upon such terms as may be deemed advisable, and to agree to a reduction in
the rate of interest on any mortgage or loan or to any other modification
or change in the terms of any mortgage or loan, or of any guarantee
pertaining thereto, in any manner and to any extent that may be deemed
advisable for the protection of the Trust Fund or the preservation of the
value of the investment; to waive any default whether in the performance of
any guarantee or to enforce any such default in such manner and to such
extent as may be deemed advisable; to exercise and enforce any and all
rights of foreclosures, to bid on property in foreclosure, to take deeds in
lieu of foreclosure with or without paying a consideration therefor, and in
connection therewith to release the obligation on the bond secured by such
mortgage and to exercise and enforce in any action, suit, or proceeding at
law or in equity any rights or remedies in respect of any such mortgage
loan or guarantee.
(10) The Trustee shall not be required in any way to determine the
correctness of the amount of any
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contribution or to take any action to compel the Employer to make any
contributions whatsoever. The Trustee shall not be required to institute
suits unless the Trustee shall have been indemnified to the Trustee's
reasonable satisfaction against all costs and expenses in connection
therewith.
(11) To employ suitable agents and counsel (who may be counsel for the
Employer) and to pay their reasonable expenses and compensation, provided
the Trustee exercises reasonable care in the selection of such agents and
counsel.
(12) To rely upon the opinion of any auditor, accountant, actuary, or
legal counsel as full and complete authority in respect of any action taken
or omitted by the Trustee in accordance with such opinion.
(13) To enter into any contracts with insurance companies to provide
for the payment of all or any part of the benefits provided under the Plan,
and to disburse under any such contract any funds held by the Trustee.
(14) To continue to have or exercise, after the termination of the
Plan and until final distribution, all the title, powers, discretions,
rights, and duties conferred or imposed upon the Trustee hereunder or by
law.
(15) To invest in qualifying Employer securities and qualifying
Employer Real Property, as those terms are defined in the ERISA of 1974,
and any amendments thereto, such investments in the aggregate not to exceed
ten percent (10%) of the fair market value of the assets of the Trust Fund.
Notwithstanding the foregoing, in a profit-sharing plan or other "eligible
individual account plan" as that term is defined in Section 407(d)(3) of
ERISA, such investments shall not exceed fifty percent (50%) of the fair
market value of the assets of the Trust Fund.
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8.05 SCOPE OF TRUSTEE'S AUTHORITY AND VOTING. The powers granted the
Trustee hereunder shall be exercised by the Trustee in his or her sole
discretion, except as to those assets of the Trust Fund for which Participants
exercise their right to direct investments pursuant to Section 3.17, and that
portion of the trust fund for which the Trustee, in accordance with Section
8.04(11), has retained investment counsel, which counsel shall have sole
discretion and authority with regard to such portion.
If there is more than one Trustee acting, each Trustee shall be entitled to
one vote on each matter submitted to a vote at a meeting of the Trustees. A
majority vote of the Trustees shall be required to take action on any matter
submitted to the Trustees for decision. If at any time there are two Trustees
who are able to act with respect to a particular matter and they are unable to
agree concerning the matter, they shall submit such matter to arbitration. The
two Trustees shall agree upon a single individual to act as arbitrator; if they
are unable to agree upon a single individual, then they or either of them shall
forthwith request the judge of any court of competent jurisdiction to appoint an
arbitrator. The decision of the arbitrator shall be rendered in writing and
shall be final and binding upon all persons and shall be deemed the decision of
the Trustees hereunder.
8.06 PAYMENTS FROM THE TRUST FUND. The Trustee shall from time to time
on written direction of the Plan Administrator make payments out of the Trust
Fund to such Participants or beneficiaries as benefit payments, in such manner
and in such amounts, as may be specified in the written direction of the Plan
Administrator, and upon any such payment being made, the amount thereof shall no
longer constitute a part of the Trust Fund. Each such written direction shall be
accompanied by a certificate of the Plan Administrator that the payment is in
accordance with the Plan. Such payments may be made either directly to persons
certified by the Plan Administrator to be entitled thereto or to
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the Plan Administrator for transmittal to such persons or as otherwise directed
by the Plan Administrator.
8.07 COMMINGLED FUNDS. Declarations of Trust executed by the Trustee and
creating commingled funds for the investment of the Trustee's fiduciary accounts
are hereby made a part of this Agreement; provided that said Declaration of
Trust complies with the Rules and Regulations of the Comptroller of the
Currency, if necessary, and the laws of any state having jurisdiction thereover
and have, where appropriate, been approved by the Internal Revenue Service.
Notwithstanding any other provision of this Agreement, the Trustee may cause all
or any part of the monies of this Trust to be commingled with monies of trusts
created by others and invested as part of the above-described commingled funds,
and monies of this trust so added to said funds at any time shall be subject to
all the provisions of the applicable Declaration of Trust as it is amended from
time to time.
The Trustee may, from time to time, withdraw from such commingled trust all
or such part of the Trust Fund as the Trustee may deem advisable.
8.08 PAYMENT OF COMPENSATION, EXPENSES, AND TAXES. The Trustee shall be
paid such reasonable compensation as shall, from time to time, be agreed upon in
writing by the Employer and the Trustee. In addition, the Trustee shall be
reimbursed for any reasonable expenses, including reasonable counsel and
accounting fees, incurred by the Trustee in the administration of the Trust
Fund. Such compensation and expenses shall be paid by the Employer, but until
paid shall constitute a charge upon the Trust Fund. All taxes of any and all
kind whatsoever that may be levied or assessed under existing or future laws
upon, or in respect of, the Trust Fund or the income thereof shall be paid from
the Trust Fund. Notwithstanding the foregoing, in the event that a Trustee is
an employee of the Employer, such Trustee shall
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not be entitled to payment of any compensation for acting as Trustee hereunder.
8.09 ACCOUNTING. The Trustee shall keep accurate and detailed accounts
of all investments, receipts, disbursements, and other transactions of the
Trust. All accounts, books, and records relating to such transactions shall be
open to inspection and audit at any time during business hours to any person
authorized by the Plan Administrator.
Within sixty (60) days following the close of each Plan Year or at such
other times as agreed upon by the Plan Administrator and Trustee, and within
sixty (60) days after the removal or resignation of a Trustee as provided in
Section 8.15, the Trustee shall file with the Plan Administrator a written
account setting forth all investments, receipts, disbursements, and other
transactions effected by the Trustee during such Plan Year or during the period
from the close of the last Plan Year to the date of such removal or resignation,
and setting forth the current book and market values of the Trust Fund.
8.10 COMMUNICATION FROM EMPLOYER AND PLAN ADMINISTRATOR. The Trustee shall
be fully protected in relying upon any written communication of an officer or
agent of the Employer or the Plan Administrator and in continuing to rely upon
such written communication until a subsequent written communication is filed
with the Trustee. The Trustee shall be fully protected in acting upon any
instrument, written communication, or paper believed by him to be genuine and to
be signed or presented by the proper person or persons, and the Trustee shall be
under no duty to make any investigation or inquiry as to any statement contained
in any such writing, but may accept the same as conclusive evidence of the truth
and accuracy of the statements therein contained. The Trustee shall be under no
duty to determine whether any contribution has been voted by the Board of
Directors of the Employer nor shall the Trustee have any duty or responsibility
to
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collect any sum so voted, the Trustee's responsibility being expressly limited
to written communications, requests, or other communications and receipt and
proper disbursements of contributions actually received by the Trustee.
8.11 INSURANCE AND BONDING. The Trustee may acquire such insurance as
the Trustee deems appropriate for the benefit of the Trust and to provide
protection against liability or loss by reason of any act or omission of a
Fiduciary as defined in the Internal Revenue Code of 1986, as amended, for
purposes of application to this Plan; provided, however, that such insurance
shall provide recourse by the insurer against the Fiduciary in the event of the
Fiduciary's breach of a fiduciary obligation. The Employer or any Fiduciary may
further acquire, at his or her own expense, such insurance as will cover
potential liability of one (1) or more persons who serve in a fiduciary capacity
with regard to this Plan.
8.12 LIABILITY FOR BREACH OF CO-FIDUCIARY. No Fiduciary, as defined by
the Internal Revenue Code of 1986, as amended, and the ERISA of 1974, as
amended, for purposes of application to the Plan, shall be liable for any act,
omission, or breach of any responsibilities of a Co-Fiduciary except as follows:
(A) If the Fiduciary knowingly participates in, or knowingly undertakes to
conceal the act or omission of such other Fiduciary, knowing that such other act
or omission is a breach of a fiduciary responsibility.
(B) If the Fiduciary, by the failure to undertake and exercise his or her
responsibilities as a Fiduciary, enables such other Fiduciary to commit a breach
of a fiduciary responsibility.
(C) If the Fiduciary has knowledge of a breach of a fiduciary
responsibility by such other Fiduciary and fails to make reasonable efforts
under the circumstances to remedy the breach.
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8.13 PROHIBITED TRANSACTIONS. No Fiduciary, as that term is defined by
the Internal Revenue Code of 1986, and the ERISA of 1974 as amended, shall allow
the Trust to engage in any prohibited transaction. If the Trust engages in a
prohibited transaction, the Fiduciary shall take all necessary steps to correct
such conditions which may result in the imposition of any tax or penalty within
any period set for the abatement of such tax or penalty or within such other
period as is required to make such change.
8.14 DISQUALIFICATION FROM FIDUCIARY SERVICE. No person shall serve or
be permitted to serve as an administrator, fiduciary, officer, trustee,
custodian, counsel, agent, or employee of this Plan or as a consultant to this
Plan who has been convicted of any of the criminal offenses specified in Section
411 of the Employee Retirement Income Security Act of 1974 or any law or
regulations of similar import, or except in accordance with said law or
regulations. No person shall knowingly permit any other person to serve in any
such capacity in violation of this Section.
8.15 REMOVAL, RESIGNATION, AND APPOINTMENT OF A SUCCESSOR TRUSTEE. Any
Trustee may be removed by the Employer at any time upon ten (10) days prior
written notice to the Trustee, or such shorter period as may be agreed to by the
Trustee. A Trustee may resign at any time upon ten (10) days prior written
notice to the Employer, or such shorter period as may be agreed to by the
Employer. Upon such removal or resignation of a Trustee and if there is no
Trustee then acting, the Employer shall appoint a successor trustee who shall be
qualified to act in such capacity and who shall have the same powers and duties
as those conferred upon the Trustee hereunder. Upon acceptance of said
appointment by a successor trustee, such successor trustee shall be deemed to be
a Trustee hereunder and shall have all of the rights, duties, and
responsibilities of a Trustee hereunder.
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In the event of the failure, for any reason, of the Employer to appoint a
successor trustee, the remaining Trustees shall continue to act. If there be no
remaining Trustees, the Trustee, and if he is unable, any interested party, may
apply to any court of competent jurisdiction for the appointment of a successor
trustee and upon such appointment, the successor trustee so appointed shall have
the same powers and duties as those conferred upon the Trustee hereunder and,
upon acceptance of such appointment by the successor trustee, the Trustee shall
assign, transfer, and pay over to such successor trustee the funds and
properties then constituting the Trust Fund.
Upon the request of such successor trustee, the Employer and the Trustee
shall execute and deliver such instruments of conveyance and the Trustee shall
execute and deliver such instruments of conveyance and further assurance and do
such other things as may reasonably be required for more fully and certainly
vesting and confirming in such successor trustee all of the right, title, and
interest of the retiring trustee in and to the Trust Fund.
Any corporation into which the Trustee or any successor trustee may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Trustee or any successor trustee may be
a party, or any corporation to which all or substantially all of the trust
business of the Trustee or any successor trustee may be transferred, shall be
the successor of such trustee without the filing of any instrument or
performance of any further act.
ARTICLE IX.
CLAIMS PROCEDURE AND PLAN ADMINISTRATION
9.01 DETERMINATION OF ELIGIBILITY AND CLAIM FOR BENEFITS. The Plan
Administrator shall determine the eligibility of each Employee for participation
in the Plan, the amount of a Participant's nonforfeitable accrued benefits, and
the amount of
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benefits payable to a Participant or beneficiary. Any person who believes he or
she is entitled to a benefit under the Plan may file a written claim for such
benefit. Within sixty (60) days of receipt of such claim, the Plan Administrator
shall make a determination regarding such claim, which determination shall be in
writing and shall set forth the basis of the determination, including specific
reasons for any denial, specific reference to Plan provisions, a description of
any additional material or information necessary for a claimant to perfect a
claim, explanation of why such material is needed, and an explanation of the
Plan's review procedure. If special circumstances require an extension of time
for processing the claim, written notice of the extension shall be given to the
claimant before the end of the sixty (60) day period. In no event shall the
extension exceed a period of ninety (90) days from the end of the initial
period. If the claimant is not given a determination within the time specified
in this paragraph, the claim shall be deemed denied.
9.02 REVIEW PROCEDURE. In the event of a dispute regarding the amount of
the nonforfeitable portion of accrued benefits or the payment of benefits, the
Participant or beneficiary shall have the right to a review of the determination
upon the filing of a written objection with the Plan Administrator within sixty
(60) days after receipt of the written determination, such objection setting
forth the basis of the claimant's position and all facts in support thereof. In
connection therewith, the claimant shall have a right to review any pertinent
documents. The decision by the Plan Administrator on said review shall be
rendered in writing within sixty (60) days after receipt of the objection and
shall set forth the basis for such decision, including specific reasons for
denial and specific references to pertinent Plan provisions. If special
circumstances require an extension of time for processing, a decision shall be
rendered as soon as possible, but not later than one hundred twenty (120) days
after receipt of the request for review. In the event no
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decision is made within the period specified in this paragraph, the claim shall
be deemed denied.
9.03 DESIGNATION OF PLAN ADMINISTRATOR. The Employer shall designate the
person or persons, including the Employer itself, to serve as Plan
Administrator, and such designee shall signify acceptance of this responsibility
as a named fiduciary of the Employer's Plan and Trust by joining in the
execution of the documents creating or amending this Plan. If more than one (1)
person is so designated, the committee so formed shall be known as the
Administrative Committee, and all references in the Plan and Trust to the Plan
Administrator shall be deemed to refer to the Administrative Committee. The
initial Plan Administrator shall be the Employer.
9.04 RESIGNATION AND REMOVAL OF PLAN ADMINISTRATOR; APPOINTMENT OF
SUCCESSOR. The Plan Administrator, or any member of the Administrative
Committee, may resign at any time by delivering to the Employer a written notice
of resignation to take effect at a date specified therein, which shall not be
less than thirty (30) days after the delivery thereof, unless such notice shall
be waived by the Employer.
The Plan Administrator may be removed with or without cause by the Employer
by delivery of written notice of removal to take effect at a date specified
therein, which shall not be less than ten (10) days after delivery thereof,
unless such notice shall be waived by the Plan Administrator.
The Employer, upon receipt of or giving notice of the resignation or
removal of the Plan Administrator, shall promptly designate a successor
administrator who must signify acceptance of this position in writing. In the
event no successor is appointed, the Board of Directors of the Employer will
function as the Administrative Committee until a new Plan Administrator has been
appointed and has accepted such appointment.
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9.05 ALLOCATION AND DELEGATION OF RESPONSIBILITIES. As a named
fiduciary, the Plan Administrator may engage agents to assist it in carrying out
its functions hereunder.
If there is an Administrative Committee, its members are expressly
authorized to allocate fiduciary responsibilities, other than Trustee
responsibilities, to named persons or parties providing such allocation or
delegation as evidenced in a signed written document, which must be retained
with the other Plan documents.
9.06 DUTIES AND RESPONSIBILITY OF PLAN ADMINISTRATOR. The primary
responsibility of the Plan Administrator is to administer the Plan for the
exclusive benefit of the Participants and their beneficiaries, subject to the
specific terms of the Plan. The Plan Administrator shall administer the Plan
and shall construe this Agreement and determine all questions of interpretation
or policy in a manner not inconsistent with this Agreement, and the Plan
Administrator's construction or determination in good faith shall be final and
conclusive. The Plan Administrator may correct any defect, supply any omission,
or reconcile any inconsistency in such manner and to such extent as shall be
deemed necessary or advisable to carry out the purposes of this Plan; provided,
however, that any interpretation or construction shall be done in a
nondiscriminatory manner and shall be consistent with the intent that the Plan
shall continue to be deemed a qualified Plan under the terms of Section 401(a)
of the Internal Revenue Code of 1986, as amended from time to time, and shall
comply with the terms of ERISA and all regulations issued pursuant thereto. The
Plan Administrator shall have all powers necessary or appropriate to accomplish
its duties under this Plan.
The Plan Administrator shall be charged with the duties of the general
administration of this Plan, including but not limited to, the following:
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(1) To determine all questions relating to the eligibility of
Employees to participate in or remain a Participant hereunder;
(2) To compute, certify, and direct the Trustee with respect to the
amount and kind of benefits to which any Participant shall be entitled
hereunder;
(3) To authorize and direct the Trustee with respect to all
disbursements from the Trust;
(4) To maintain all the necessary records for the administration of
the Plan;
(5) To interpret the provisions of the Plan and to make and publish
such rules for regulation of the Plan as are not inconsistent with the
terms hereof;
(6) To determine the size and type of any contract to be purchased
from an insurer for any Participant hereunder;
(7) To advise the Trustee regarding the short and long-term liquidity
needs of the Plan in order that the Trustee might direct its investments
accordingly;
(8) To advise, counsel, and assist any Participant regarding any
rights, benefits, or elections available under the Plan. The Plan
Administrator shall also be responsible for preparing and filing such
annual disclosure reports and tax forms as may be required from time to
time.
The Plan Administrator must furnish to each Participant covered under the
Plan and to each beneficiary who is entitled to receive benefits under the Plan
such information and reports at such time and under such circumstances as may be
required by law.
The Plan Administrator shall make copies of the Plan description and the
latest annual report and any bargaining agreement, trust agreement, contract, or
other instruments under which the Plan was established or is operated available
for examination by any Plan Participant or beneficiary in the principal office
of the Plan Administrator and the Employer.
108.
<PAGE>
Whenever it is determined by the Plan Administrator to be in the best
interest of the Plan and its Participants or beneficiaries, it may request such
variances, deferrals, extensions, or exemptions or make such elections for the
Plan as may be available under the law.
The Plan Administrator shall be responsible for procuring bonding for any
persons dealing with the Plan or its assets as may be required by law or by
Section 8.11 of this Plan.
The Plan Administrator is hereby designated as agent for service of legal
process.
9.07 INVESTMENT ADVISERS.
(A) Appointment of Investment Advisers. The Plan Administrator shall have
----------------------------------
the right to appoint one or more Investment Advisers. All appointments of
Investment Advisers shall be by written agreement between the Plan Administrator
and the Investment Adviser. The Trustee shall receive a copy of each such
agreement and all amendments, modifications and terminations thereof and shall
give written acknowledgment of receipt of same. Until receipt of a copy of each
such amendment, modification or termination, the Trustee shall be fully
protected in assuming the continuing authority of such Investment Adviser under
the terms of its original agreement with the Plan Administrator as theretofore
amended or modified.
(B) Investment Adviser Agreements. Among other matters, each agreement
-----------------------------
between the Plan Administrator and an Investment Adviser or an agreement between
the Investment Adviser and the Trustee shall provide that:
(1) All directions given by the Investment Adviser to the Trustee
shall be in writing, signed by an officer or partner of the Investment
Adviser or by such other person as may be designated in writing by the
Investment Adviser; provided that the Trustee shall accept oral directions
for the purchase or sale of
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securities which shall be confirmed by such authorized personnel of the
Investment Adviser in writing.
(2) Should the Investment Adviser and the Trustee find it desirable,
the Investment Adviser shall receive a power of attorney from the Trustee
in such form and substance as may be approved by the Trustee and the Plan
Administrator, authorizing the Investment Adviser to effect transactions
directly for its Investment Account.
(3) All settlement of purchase and sales are to be in such place as
the Trustee and Investment Advisers may agree.
(4) Payment of the cost of the acquisition, sale or exchange of any
security or other property for an Investment Account shall be charged to
that Investment Account.
(5) The Investment Adviser acknowledges that it is a "fiduciary" of
the Plan and that for the term of the agreement it will qualify as an
"investment manager" (as both of said terms are used in ERISA).
(C) Notification of Appointment of Investment Advisers. Written notice of
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each appointment of an Investment Adviser shall be given to the Trustee in
advance of the effective date of the appointment. Such notice shall state the
part of the Trust Fund which is to become the Investment Account of the
Investment Adviser and shall either include or be accompanied by a direction to
the Trustee establishing the Investment Account as an Investment Fund. Upon
receipt of said notice, the Trustee shall allocate the designated part of the
Trust Fund to the Investment Account of such Investment Adviser. The Plan
Administrator may by similar notice modify such designation from time to time.
(D) Investment Adviser's Authority. So long as the appointment of an
------------------------------
Investment Adviser is in effect, the Trustee shall follow the directions of the
Investment Adviser with respect to its Investment Account in exercising the
powers
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granted to the Trustee in this instrument regarding investment of the Fund.
(E) Trustee's Responsibility for Investment Adviser's Account. The Trustee
---------------------------------------------------------
shall monitor all instructions from the Investment Advisers and shall notify the
Plan Administrator in the event that it considers any instruction to involve an
improper investment of the Fund. However, the Trustee shall have no further
duty to question such instructions and, except as may be otherwise provided by
ERISA, the Trustee shall not be liable for any loss which may result by reason
of any action taken by such Trustee in accordance with a direction of an
Investment Adviser acting within the powers granted to it under this Section, or
by reason of any lack of action by such Trustee upon the failure of an
Investment Adviser to exercise its said powers.
(F) Investment Adviser's Access to Records. The Trustee shall make
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available to an Investment Adviser copies of or extracts from such portions of
its accounts, books or records relating to the Investment Account of such
Investment Adviser as the Trustee may deem necessary or appropriate in
connection with the exercise of the Investment Adviser's functions, or as the
Plan Administrator may direct.
9.08 EXPENSES AND COMPENSATION. The expenses necessary to administer the
Plan shall be borne by the Employer and shall be reimbursed to the Plan,
including but not limited to those involved in retaining necessary professional
assistance from an attorney, an accountant, an actuary, or an investment
adviser. The Employer shall furnish the Plan Administrator with such clerical
and other assistance as is necessary in the performance of its duties. Nothing
shall prevent the Plan Administrator from receiving reasonable compensation for
services rendered in administering this Plan, provided the Plan Administrator is
not a full-time employee of the Employer creating this Plan.
9.09 INFORMATION FROM EMPLOYER. To enable the Plan Administrator to
perform its functions, the Employer shall supply
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full and timely information to the Plan Administrator on all matters relating to
the Compensation of all Participants, their continuous regular employment, their
retirement, death, disability, termination of employment, and such other
pertinent facts as the Plan Administrator may require; and the Plan
Administrator shall advise the Trustee of such of the foregoing facts as may be
pertinent to the Trustee's duties under the Plan. The Plan Administrator is
entitled to rely on such information as is supplied by the Employer and shall
have no duty or responsibility to verify such information.
ARTICLE X.
AMENDMENT AND TERMINATION
10.01 AMENDMENT. The Employer shall have the right at any time, and from
time to time:
(1) To amend this Agreement in such manner as it may deem necessary or
advisable in order to qualify this Agreement and the Trust created hereby
under the provisions of Code Section 401(a), and any such amendment may by
its terms be retroactive; and
(2) To amend this Agreement in any other manner. However, no such
amendment shall authorize or permit any part of the Trust Fund (other than
such part as is required to pay taxes and administration expenses) to be
used for or diverted to purposes other than for the exclusive benefit of
the Participants or their beneficiaries or their estates; no such amendment
shall cause any reduction in the vested portion of any Participant's
proportionate interest in the Trust Fund, or cause or permit any portion of
the Trust Fund to revert to or become the property of the Employer; and no
amendments shall cause the elimination or reduction of any benefits
protected under Code Section 411(d)(6) existing on the date of the
amendment unless otherwise permitted under Treasury regulations; and no
such amendment which affects
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the rights, duties, or responsibilities of the Trustee may be made without the
Trustee's written consent.
Any such amendments shall become effective upon delivery of a written
instrument, executed on behalf of the Employer by its proper officers duly
authorized, directed to the Plan Administrator and the Trustee and the
endorsement of the Plan Administrator and the Trustee of its receipt or of its
written consent thereto, if such consent is required.
10.02 TERMINATION OR DISCONTINUANCE OF CONTRIBUTIONS. The Employer shall
have the right at any time to discontinue its contributions hereunder and to
terminate this Agreement and/or the Trust hereby created by delivering to the
Trustee written notice of such discontinuance or termination; provided, however,
that such termination is made in accordance with the applicable provisions of
law.
Upon total termination of the Trust and in accordance with provisions of
law, the Plan Administrator shall direct the Trustee to distribute all assets
remaining in the Trust, after payment of any expenses properly chargeable
against the Trust, to the Participants in proportion to the amount credited to
the account of each such Participant as of the date of such termination.
10.03 MERGER. Unless this Trust is sooner terminated, a successor to the
business of the Employer by whatever form or manner resulting may, upon
appropriate Board of Directors action of both the Employer and successor, and
subject to the provisions of this paragraph, continue this Plan and Trust by
executing an appropriate supplemental agreement. Such successor shall ipso
----
facto succeed to all the rights, powers, and duties of the Employer hereunder.
- -----
The employment of any Employee who is continued in the employ of such successor
shall not be deemed to have been terminated or severed for any purposes
hereunder. Notwithstanding the foregoing, no merger shall occur unless in
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the case of any merger or consolidation of the Plan with, or in the case of any
transfer of assets or liabilities of such Plan, to any other trust or plan, each
Participant in the Plan would, if the Plan then terminated, receive a benefit
immediately after the merger, consolidation, or transfer which is equal to or
greater than the benefit such Participant would have been entitled to receive
immediately before the merger, consolidation, or transfer if the Plan had been
terminated.
ARTICLE XI.
GENERAL PROVISIONS
11.01 PARTICIPANTS' RIGHTS. Neither the establishment of the Trust
hereby created, nor any modification thereof, nor the creation of any fund or
account, nor the payments of any benefits, shall be construed as giving to any
Participant or other person any legal or equitable right against the Employer or
any officer or employee thereof, Trustee, or Plan Administrator, except as
provided herein or by law. Under no circumstances shall the terms of employment
of any Participant be modified or in any way affected hereby.
11.02 NONALIENATION OF BENEFITS.
(A) Subject to the exceptions provided below, no benefit which shall be
payable out of the Trust to any person (including a Participant or beneficiary)
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge, and any attempt to anticipate,
alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be
void; and no such benefit shall in any manner be liable for, or subject to, the
debts, contracts, liabilities, engagements, or torts of any such person, nor
shall it be subject to attachment or legal process for or against such person,
and the same shall not be recognized by the Trustee, except to such extent as
may be required by law.
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(B) This provision shall not apply to the extent a Participant or
beneficiary is indebted to the Plan, for any reason, under any provision of this
Agreement. At the time a distribution is to be made to or for a Participant's
or beneficiary's benefit, such proportion of the amount distributed as shall
equal such indebtedness shall be paid by the Trustee to the Trustee or the Plan
Administrator, at the direction of the Plan Administrator, to apply against or
discharge such indebtedness. Prior to making a payment, however, the
Participant or beneficiary must be given written notice by the Plan
Administrator that such indebtedness is to be so paid in whole or part from the
Participant's account. If the Participant or beneficiary does not agree that
the indebtedness is a valid claim against his or her vested Participant's
account, he or she shall be entitled to a review of the validity of the claim in
accordance with procedures provided in Sections 9.01 and 9.02.
(C) This provision shall not apply to a "qualified domestic relations
order" defined in Code Section 414(p), and those other domestic relations orders
permitted to be so treated by the Plan Administrator under the provisions of the
Retirement Equity Act of 1984. The Plan Administrator shall establish a written
procedure to determine the qualified status of domestic relations orders and to
administer distributions under such qualified orders. Further, to the extent
provided under a "qualified domestic relations order", a former spouse of a
Participant shall be treated as the spouse or surviving spouse for all purposes
under the Plan.
11.03 DELEGATION OF AUTHORITY BY EMPLOYER. Whenever the Employer under
the terms of this Agreement is permitted or required to do or perform any act or
matter or thing, it shall be done and performed by any officer duly authorized
by its Board of Directors.
11.04 EXERCISE OF DISCRETION BY CORPORATE TRUSTEE. Any judgment or
discretion in this Agreement provided to be exercised
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by the Trustee may, in the case of a corporate trustee, be exercised by its
Board of Directors, Executive Committee, President or any Vice President, or any
other authorized officer. A corporate trustee may deposit with itself cash or
funds constituting part of the Trust herein created, pursuant to the provisions
of Code Section 4975(d)(4) and Section 408(b)(4) of ERISA; or pursuant to
specific directions from (1) an unrelated fiduciary or (2) a participant acting
pursuant to Section 3.17; or pursuant to an exemption granted by the Department
of Labor or other authorized agency.
11.05 CONTROL OF TRADES OR BUSINESSES BY OWNER-EMPLOYEE. If this Plan
provides contributions or benefits for one or more owner-employees who control
both the business for which this Plan is established and one or more other
trades or businesses, this Plan and the Plan established for other trades or
businesses must, when looked at as a single plan, satisfy Code Sections 401(a)
and (d) for the employees of this and all other trades or businesses.
If the Plan provides contributions or benefits for one or more owner-
employees who control one or more other trades or businesses, the employees of
the other trades or businesses must be included in a plan which satisfies Code
Sections 401(a) and (d) and which provides contributions and benefits not less
favorable than provided for owner-employees under this Plan.
If an individual is covered as an owner-employee under the plans of two or
more trades or businesses which are not controlled and the individual controls a
trade or business, then the contributions or benefits of the employees under the
Plan of the trades or businesses which are controlled must be as favorable as
those provided for such owner-employee under the most favorable plan of the
trade or business which is not controlled.
For purposes of the preceding paragraphs, an owner-employee, or two or more
owner-employees, will be considered to control a
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trade or business if the owner-employee, or two or more owner-employees
together:
(1) own the entire interest in an unincorporated trade or business, or
(2) in the case of a partnership, own more than fifty percent (50%) of
either the capital interest or the profits interest in the partnership.
For purposes of the preceding sentence, an owner-employee, or two or more
owner-employees shall be treated as owning any interest in a partnership which
is owned, directly or indirectly, by a partnership which such owner-employee, or
such two or more owner-employees, are considered to control within the meaning
of the preceding sentence.
11.06 CONSTRUCTION OF AGREEMENT. This Trust Agreement shall be construed
according to the laws of the State of Wisconsin, and all provisions hereof shall
be administered according to the laws of such state. When making determinations
affecting Employees' rights pursuant to this Agreement, the Employer and Plan
Administrator shall uniformly follow rules of consistent application.
11.07 GENDER, NUMBER, AND HEADINGS. Wherever any words are used herein
in the masculine gender, they shall be construed as though they were also used
in the feminine gender in all cases where they would so apply, and wherever any
words are used herein in the singular form, they shall be construed as though
they were also used in the plural form in all cases where they would so apply.
Headings of Sections and Subsections of this Agreement are inserted for
convenience of reference; they constitute no part of this Agreement and are not
to be considered in the construction hereof.
11.08 QUALIFICATION.
(A) It is the intent of the Employer that this Plan shall be for the
exclusive benefit of its Employees and shall qualify for
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approval under Code Section 401(a), as amended from time to time (or
corresponding provisions of any subsequent federal law at that time in effect).
In case of any ambiguity, the Plan language shall be interpreted to accomplish
such result. It is further intended that the Plan comply with the provisions of
the Employee Retirement Income Security Act of 1974 (ERISA) as amended from time
to time.
(B) If the Internal Revenue Service determines that the Plan and Trust do
not qualify initially under Code Section 401(a) or any statute of similar
import, all contributions made by the Employer shall be returned to the Employer
by the Trustee within one (1) year after the date of denial of qualification.
Earnings of the Plan attributable to the excess contribution may not be returned
to the Employer, but any losses attributable thereto must reduce the amount so
returned.
(C) Notwithstanding any provision in this Agreement to the contrary, no
Participant or beneficiary shall have any right or claim to any asset of the
Trust or to any benefit under the Plan before the Internal Revenue Service
determines that the Plan and Trust qualify under the provisions of Code Section
401(a) or any similar statute of similar import.
(D) Upon the return of all contributions to the Employer as provided in
Section 11.08(B), the Trust shall terminate and the Trustee shall be discharged
from all obligations under the Trust.
11.09 PROHIBITION OF DIVERSION OF FUNDS. Except as provided herein, it
shall be impossible by operation of the Plan and of the Trust, by natural
termination of either, by power of revocation or amendment, by the happening of
any contingency, by collateral arrangement, or by any other means, for any part
of the corpus or income of any Trust Fund maintained pursuant to the Plan or any
funds contributed thereto to be used for, or diverted to, purposes other than
the exclusive benefit of Participants, former Participants, or their
beneficiaries. Notwithstanding the foregoing, contributions made by the
Employer by mistake of fact and contributions found not to be currently
deductible under Code
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Section 404, to the extent the deduction is disallowed or determined to be
nondeductible pursuant to an IRS ruling, may be returned to the Employer within
one (1) year after the payment of the contribution in the first instance or
disallowance of the deduction or issuance of a ruling in the second instance.
Earnings of the Plan attributable to the excess contributions may not be
returned to the Employer, but any losses attributable thereto must reduce the
amount so returned.
11.10 ROLLOVERS AND TRANSFERS FROM QUALIFIED PLANS.
(A) With the consent of the Plan Administrator, a Participant may transfer
amounts from other qualified plans, provided that the trust from which such
funds are transferred permits the transfer to be made and, in the opinion of
legal counsel for the Employer, the transfer will not jeopardize the tax exempt
status of the Plan or Trust or create adverse tax consequences for the Employer.
The amounts transferred shall be set up in a separate account herein referred to
as a Participant's Rollover Account. Such account shall be fully vested at all
times and shall not be subject to forfeiture for any reason.
Notwithstanding the foregoing, amounts which are subject to the joint and
survivor annuity requirements of Code Sections 401(a)(11) and 417 shall not be
accepted as transfer or rollover contributions.
(B) Distributions from Rollover Accounts shall be subject to the Plan's
distribution provisions. Distributions from Rollover Accounts may be made to
Participants prior to separation from service, pursuant to Sections 5.10 and
6.10.
(C) The Plan Administrator may direct that rollovers and transfers made
after the first month of the Plan Year pursuant to this Section be segregated
into a separate account for each Participant in a federally insured savings
account, certificate of deposit in a bank or savings and loan association, money
market certificate, or other short term debt security acceptable to the Trustee
until the first day of the following Plan Year, at which time they shall be
invested as determined by the Trustee
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pursuant to Section 8.04 or by the Participant pursuant to Section 3.17.
(D) Unless the Plan Administrator directs that the Participants' Rollover
Accounts be segregated into a separate account for each Participant in a
federally insured savings account, certificate of deposit in a bank or savings
and loan association, money market certificate, or other short term debt
security acceptable to the Trustee, such accounts shall be invested as part of
the general Trust Fund or as directed by the Participant pursuant to Section
3.17.
(E) For purposes of this Section, the term "amounts transferred from other
qualified plans" shall mean:
(1) amounts transferred to this Plan directly from another qualified
plan;
(2) lump-sum distributions received by an Employee from another
qualified plan which are eligible for tax free rollover to a qualified plan
and which are transferred by the Employee to this Plan within sixty (60)
days following his or her receipt thereof;
(3) amounts transferred to this Plan from a conduit individual
retirement account provided that the conduit individual retirement account
has no assets other than assets which
(a) were previously distributed to the Employee by another
qualified corporate (and, after December 31, 1983, noncorporate) plan
as a lump sum distribution,
(b) were eligible for tax free rollover to a qualified corporate
or noncorporate plan, and
(c) were deposited in such conduit individual retirement account
within sixty (60) days of receipt thereof, and other than earnings on
said assets.
(4) amounts distributed to the Employee from a conduit individual
retirement account meeting the
120.
<PAGE>
requirements of clause (3) above, and transferred by the Employee to this
Plan within sixty (60) days of his or her receipt thereof from such conduit
individual retirement account.
Prior to accepting any transfers to which this Section applies, the Plan
Administrator may require the Employee to establish that the amounts to be
transferred to this Plan meet the requirements of this Section and may also
require the Employee to provide an opinion of counsel satisfactory to the
Employer that the amounts to be transferred meet the requirements of this
Section.
(F) For purposes of this Section, the term "qualified plan" shall mean any
tax qualified plan under Code Section 401(a).
(G) Amounts allocated to a Participant's Rollover Account may be treated as
a Directed Investment Account pursuant to Section 3.17.
11.11 PORTABILITY. (A) If a Participant shall be entitled to receive
benefits under this Plan and participates in another qualified plan maintained
by the Employer, or if such Participant shall be subsequently employed by
another employer which has a plan qualified pursuant to Code Section 401(a), the
Trustee may transfer the Participant's vested benefits under this Plan directly
to the trustee of the other plan of the Employer or to the trustee of the plan
of the Participant's new employer if the following conditions are satisfied:
(1) The trustee of the other plan shall be authorized to accept the
benefits under this Plan; and
(2) The Participant's transferred assets shall be maintained in a
separate account in the other plan; and
(3) The Participant's transferred assets shall not be forfeitable or
reduce in any way the obligation of the Employer or the new employer.
(B) (1) This Paragraph (B) applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the Plan to the contrary that
would otherwise limit a
121.
<PAGE>
distributee's election under this Paragraph (B), a distributee may elect, at the
time and in the manner prescribed by the Plan Administrator, to have any portion
of an eligible rollover distribution paid directly to an eligible retirement
plan specified by the distributee in a direct rollover.
(2) Definitions
-----------
(a) Eligible Rollover Distribution: An eligible rollover
distribution is any distribution of all or any portion of the balance to
the credit of the distributee, except that an eligible rollover
distribution does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually)
made for the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the distributee's
designated beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Code Section
401(a)(9); and the portion of any distribution that is not includible in
gross income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities).
(b) Eligible Retirement Plan: An eligible retirement plan is an
individual retirement account described in Code Section 408(a), an
individual retirement annuity described in Code Section 408(b), an annuity
plan described in Code Section 403(a), or a qualified trust described in
Code Section 401(a), that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover distribution to
the surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
(C) Distributee: A distributee includes an employee or former
employee. In addition, the employee's or former employee's surviving
spouse and the employee's or former employee's spouse or former spouse who
is the alternate
122.
<PAGE>
payee under a qualified domestic relations order, as defined in Code
section 414(p), are distributees with regard to the interest of the spouse
or former spouse.
(d) Direct Rollover. A direct rollover is a payment by the Plan to
the eligible retirement plan specified by the distributee.
123.
<PAGE>
IN WITNESS WHEREOF, the Employer and Trustee have caused this Agreement to
be executed on June 30, 1995.
Pleasant Company
(Employer and Plan Administrator)
By: /s/ Catharine B. Walker
___________________________________
Firstar Bank Madison, N.A.
(Trustee)
By: /s/ Marcia B. Butler
___________________________________
<PAGE>
EXHIBIT 10.23
===========================================================================
NOTICE OF GRANT OF STOCK MATTEL, INC.
OPTIONS AND GRANT AGREEMENT ID: 95-1567322
333 Continental Boulevard
El Segundo, CA 90245
- ---------------------------------------------------------------------------
- --------------------------
Name of Optionee
- --------------------------
Address
- --------------------------
City, State Zip Code
ID: - -
------ -- ------
You have been granted an option to buy Mattel, Inc. Common Stock as
follows:
---------------------------------------------------------------
Non-Qualified Stock Option Grant Number
---------------------------------------------------------------
Date of Grant
---------------------------------------------------------------
Stock Option Plan 1996
---------------------------------------------------------------
Total Number of Shares Granted
---------------------------------------------------------------
Option Price per Share $
---------------------------------------------------------------
Vesting Schedule Year
---------------------------------------------------------------
- ---------------------------------------------------------------------------
By signing your name below, you and Mattel, Inc. agree that (a) this Option
is granted under and governed by the terms and conditions of the Grant
Agreement referenced above, which is attached hereto and made a part of
this document, and (b) both of these documents are subject to the terms of
the above referenced Stock Option Plan.
- -
- ----------------------- -----------------------
Full Legal Name (print) Social Security Number
Current Address: _______________________
_______________________
===========================================================================
- ------------------------------------------ ----------------------------
For MATTEL, INC. Date
- ------------------------------------------ ----------------------------
Optionee Date
<PAGE>
Grant Agreement for a
Non-Qualified Stock Option
under the Mattel 1996 Stock Option Plan
This is an Option Agreement between Mattel, Inc. (the "Company") and the
individual (the "Option Holder") named in the Notice of Grant of Stock Option
(the "Notice) attached hereto as the cover page of this agreement.
RECITALS
The Company has adopted the Mattel 1996 Stock Option Plan (the "Plan") for
the granting to selected employees of options to purchase shares of Common Stock
of the Company. In accordance with the terms of the Plan, the
Compensation/Options Committee of the Board of Directors (the "Committee"), has
approved the execution of this Grant Agreement (the "Option") between the
Company and the Option Holder. Capitalized terms used herein without definition
shall have the meanings assigned to such terms in the Plan.
OPTION
1. Terms. The Company grants to the Option Holder the right and option
-----
to purchase on the terms and conditions hereinafter set forth, all or any part
of the aggregate number of shares set forth in the Notice of Common Stock
exercisable in accordance with the provisions of this Option during a period
expiring ten years from the date of the Notice (the "Expiration Date"), unless
terminated prior to that date pursuant to Section 5 or 6 below. This Option is
a Non-Qualified Stock Option.
2. Exercisability (Vesting). The Option Holder may purchase the following
------------------------
cumulative percentages of the shares of Common Stock set forth in the Notice on
the dates set forth below; provided that the Option Holder is employed by the
Company or one of its Subsidiaries on the applicable vesting date:
<TABLE>
<CAPTION>
Percent of Shares
Commencing on the Date of this Option Subject to this Option
that may be Purchased
================================================================================
<S> <C>
On and Before First Anniversary 0%
- --------------------------------------------------------------------------------
After the First Anniversary 25%
- --------------------------------------------------------------------------------
After the Second Anniversary 50%
- --------------------------------------------------------------------------------
After the Third Anniversary 75%
- --------------------------------------------------------------------------------
After the Fourth Anniversary and Until the Expiration Date 100%
================================================================================
</TABLE>
The number of shares that may be purchased upon exercise of this Option
shall in each case be calculated to the nearest full share.
<PAGE>
3. Method of Exercising. Each exercise of this Option shall be by means
--------------------
of a written notice of exercise delivered to the office of the Secretary of the
Company, specifying the number of whole shares to be purchased, accompanied by
payment of the full purchase price of the shares to be purchased. The payment
shall be in the form of cash or such other forms of consideration as the
Committee shall deem acceptable, such as the surrender of outstanding shares of
Common Stock owned by the Option Holder or by withholding shares that would
otherwise be issued upon the exercise of the Option. The Option Holder may
exercise this Option by the delivery to the Company or its designated agent of
an irrevocable written notice of exercise form together with irrevocable
instructions to the broker-dealer to sell or margin a sufficient portion of the
shares of Common Stock and to deliver the sale or margin loan proceeds directly
to the Company to pay the exercise price of this Option.
4. Withholding. Upon exercise, the Option Holder shall pay, or make
-----------
provisions satisfactory to the Company or its Subsidiary for payment of any
federal, state and local taxes required to be withheld.
5. Cancellation of Grants. Option Holder specifically acknowledges that
----------------------
this Option is subject to the provisions of Section 20 of the plan, entitled
"Cancellation of Grants," which can cause the forfeiture of this Option, or the
rescission of Common Stock acquired upon the exercise of this Option. As a
condition of the exercise of this Option, the Option Holder shall certify on a
form acceptable to the Committee that he or she is in compliance with the terms
and conditions of the plan, including Section 20 thereof, entitled "Cancellation
of Grants."
6. Term. Any portion of this Option that is not exercisable pursuant to
----
Section 2 on the date upon which the Option Holder's employment with the Company
and its Subsidiaries terminates shall terminate immediately upon the termination
of the Option Holder's employment with the Company and its Subsidiaries. Any
portion of this Option that is exercisable on the date upon which the Option
Holder's employment with the Company and its Subsidiaries terminates shall
terminate sixty (60) days after the Option Holder ceases to be an employee of
the Company or one of its Subsidiaries for any reason other than as described
below.
i. If the Option Holder's employment is terminated by reason of
death, the heirs of the Option Holder will be able to exercise this
Option until the earlier of (a) one (1) year following the death of the
Optionee or (b) the date on which this Option would otherwise expire.
ii. If the Option Holder's employment is terminated after the
attainment of age fifty-five (55) and the completion of five (5) years of
service (as determined in accordance with the terms of the Mattel, Inc.
Personal Investment Plan), the Option Holder will be able to exercise this
Option until the earlier of (a) five (5) years following termination of
employment or (b) the date on which this Option would otherwise expire.
2
<PAGE>
7. Compliance with Law. No shares issuable upon the exercise of this
-------------------
Option shall be issued and delivered unless and until all applicable
registration requirements of the Securities Act of 1933, all applicable listing
requirements of any national securities exchange on which the Common Stock is
then listed, and all other requirements of law or of any regulatory bodies
having jurisdiction over such issuance and delivery, shall have been complied
with. In particular, the Committee may require certain investment (or other)
representations and undertakings in connection with the issuance of securities
in connection with the Plan in order to comply with applicable law.
8. Assignability. Except as may be effected by will or by the laws of
-------------
descent and distribution, any attempt to assign this Option shall be of no
effect.
9. Certain Corporate Transactions. In the event of any change in the
------------------------------
Common Stock by reason of a stock split, stock dividend, combination or
reclassification of shares, recapitalization, merger, or similar event the
Committee may adjust proportionately the number of shares and the stock price of
the Common Stock subject to this Option. In the event of any other change
affecting the Common Stock or any distribution (other than normal cash
dividends) to holders of Common Stock, the Committee may make such adjustments
as it may deem equitable (including adjustments to avoid fractional shares) in
order to give proper effect to such event. In the event of a corporate merger,
consolidation, acquisition of property or stock, spin-off, reorganization or
liquidation, the Committee may substitute a new option for this Option or
provide for the assumption of this Option by the other corporation that is a
party to the transaction.
10. No Additional Rights. Neither the granting of this Option nor its
--------------------
exercise shall (a) confer upon the Option Holder any right to continue in the
employ of the Company (b) interfere in any way with the rights of the Company or
a Subsidiary to terminate such employment at any time for any reason, with or
without cause, or (c) interfere with the right of the Company or a Subsidiary to
undertake any lawful corporate action. Option Holder acknowledges that he or
she is an "employee at will." The provisions of this Section 10 are subject to
the terms of any employment agreement between the Option Holder and the Company
(or a Subsidiary).
11. Rights as a Stockholder. Neither the Option Holder nor any other
-----------------------
person legally entitled to exercise this Option shall be entitled to any of the
rights or privileges of a stockholder of the Company in respect of any shares
issuable upon any exercises of this Option unless and until a certificate or
certificates representing such shares shall have been actually issued and
delivered to the Option Holder.
12. Compliance with Plan. This Option is subject to, and the Company
--------------------
and Option Holder agree to be bound by, all of the terms and conditions of the
Plan as it shall be amended from time-to-time. No amendment to the plan shall
adversely affect this Option without the consent of the Option Holder. In the
case of a conflict between the terms of the Plan and this Option, the terms of
the Plan shall govern.
3
<PAGE>
13. Governing Law. This Option has been granted, executed and delivered
-------------
with effect from the date of Notice, at El Segundo, California, and
interpretation, performance and enforcement of this Option shall be governed by
the laws of the State of Delaware.
4
<PAGE>
EXHIBIT 10.26
SECOND AMENDMENT TO
MATTEL, INC. 1997 PREMIUM PRICE STOCK OPTION PLAN
The Mattel, Inc. 1997 Premium Price Stock Option Plan (the "Plan") is
amended as follows, effective as of February 4, 1999.
Section 5.1 of the Plan is hereby amended to read as follows:
5.1. NUMBER OF SHARES. The maximum number of shares of Common Stock for
which Grants may be awarded under the Plan shall be 24,000,000, which maximum
number is divided into two separate allocations. The first allocation comprises
a maximum number of 20,000,000 shares, which shares may be granted to any
eligible employee, as provided in Sections 6.1 and 6.2. The second allocation
comprises a maximum number of 4,000,000 shares, which shares may be granted only
to new employees described in Section 6.3. Any adjustments made under Sections
5.2, 5.3 or 5.4 with respect to any Grant shall operate as adjustment of the
maximum limit set forth above for the allocation from which the Grant was
originally made.
IN WITNESS WHEREOF, the Company has caused this Third Amendment to the Plan
to be executed this 30th day of March , 1999, effective as of February 4,
1999.
MATTEL, INC.
a Delaware Corporation
By /s/ Alan Kaye
--------------------------------
ALAN KAYE
Title: Senior Vice President, Human Resources
<PAGE>
EXHIBIT 11.0
(Page 1 of 2)
MATTEL, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,(a)(b)
------------------------------------------------
Basic 1998 1997 1996 1995 1994
- ----- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before extraordinary
item....................... $332,264 $289,794 $372,224 $337,889 $224,670
Deduct:
Dividends on convertible
preferred stock.......... (7,960) (10,505) (7,391) (3,200) (2,157)
Dividends on convertible
preference stock......... -- -- -- (3,342) (4,689)
-------- -------- -------- -------- --------
Income before extraordinary
item for
computation of income per
share...................... 324,304 279,289 364,833 331,347 217,824
Extraordinary item.......... -- (4,610) -- -- --
-------- -------- -------- -------- --------
Net income applicable to
common shares.............. $324,304 $274,679 $364,833 $331,347 $217,824
======== ======== ======== ======== ========
Applicable Shares for
Computation of Income
per Share:
Weighted average common
shares outstanding......... 291,481 290,450 290,393 293,312 292,526
======== ======== ======== ======== ========
Basic Income Per Common
Share:
Net income per common share
before extraordinary item.. $ 1.11 $ 0.96 $ 1.26 $ 1.13 $ 0.74
Extraordinary item.......... -- (0.01) -- -- --
-------- -------- -------- -------- --------
Net income per common
share...................... $ 1.11 $ 0.95 $ 1.26 $ 1.13 $ 0.74
======== ======== ======== ======== ========
</TABLE>
- --------
(a) Consolidated financial information for 1994-1997 has been restated
retroactively for the effects of the March 1997 merger with Tyco Toys, Inc.
("Tyco"), accounted for as a pooling of interests.
(b) Per share data reflect the retroactive effect of stock splits distributed
to stockholders in March 1996, January 1995 and January 1994, and the 1997
merger with Tyco.
<PAGE>
EXHIBIT 11.0
(Page 2 of 2)
MATTEL, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,(a)(b)
----------------------------------------------
Diluted 1998 1997 1996 1995 1994
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before extraordinary
item......................... $332,264 $289,794 $372,224 $337,889 $224,670
Add: Interest savings, net of
tax, applicable to:
Assumed conversion of 7%
Notes...................... -- 479 728 692 954
Assumed conversion of 8%
convertible debentures..... -- -- -- -- 628
Deduct: Dividends on
convertible preferred stock.. -- (10,505) -- (3,200) (2,157)
Impact of required ESOP
dividends or contributions
upon conversion........... -- -- -- (3,342) (4,689)
-------- -------- -------- -------- --------
Income before extraordinary
item for computation of
income per share............. 332,264 279,768 372,952 332,039 219,406
Extraordinary item............ -- (4,610) -- -- --
-------- -------- -------- -------- --------
Net income applicable to
common shares................ $332,264 $275,158 $372,952 $332,039 $219,406
======== ======== ======== ======== ========
Applicable Shares for
Computation of Income
Per Share:
Weighted average common shares
outstanding.................. 291,481 290,450 290,393 293,312 292,526
Weighted average common
equivalent shares arising
from:
Dilutive stock options...... 3,369 3,975 3,484 3,272 3,090
Assumed conversion of
convertible preferred
stock...................... 7,731 -- 6,867 -- --
Assumed conversion of
convertible preference
stock...................... -- -- -- -- --
Assumed conversion of 7%
Notes...................... -- 589 783 744 699
Assumed conversion of 8%
convertible debentures..... -- -- -- -- 1,619
Stock subscription
warrants................... 655 639 927 928 1,023
Disney warrant.............. 7 -- --
Nonvested stock............. -- -- 603 507 238
-------- -------- -------- -------- --------
Weighted average number of
common and common equivalent
shares....................... 303,243 295,653 303,057 298,763 299,195
======== ======== ======== ======== ========
Diluted Income Per Common
Share:
Net income per common share
before extraordinary item.... $ 1.10 $ 0.94 $ 1.23 $ 1.11 $ 0.73
Extraordinary item............ -- (0.01) -- -- --
-------- -------- -------- -------- --------
Net income per common share... $ 1.10 $ 0.93 $ 1.23 $ 1.11 $ 0.73
======== ======== ======== ======== ========
</TABLE>
- --------
(a) Consolidated financial information for 1994-1997 has been restated
retroactively for the effects of the March 1997 merger with Tyco, accounted
for as a pooling of interests.
(b) Per share data reflect the retroactive effect of stock splits distributed
to stockholders in March 1996, January 1995 and January 1994, and the 1997
merger with Tyco.
<PAGE>
EXHIBIT 12.0
(Page 1 of 2)
MATTEL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands, except ratios)
<TABLE>
<CAPTION>
For the Years Ended December 31,(a)
-----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings Available for Fixed
Charges:
Income before income taxes,
cumulative effect of changes
in accounting principles and
extraordinary items.......... $465,063 $425,082 $536,756 $504,668 $362,157
Less (plus) minority interest
and undistributed income
(loss) of less-than-majority-
owned affiliates, net........ (165) (144) 303 (36) (649)
Add:
Interest expense............ 110,833 90,130 100,226 102,983 87,071
Appropriate portion of
rents(b)................... 16,262 17,665 19,527 19,450 16,224
-------- -------- -------- -------- --------
Earnings available for fixed
charges...................... $591,993 $532,733 $656,812 $627,065 $464,803
======== ======== ======== ======== ========
Fixed Charges:
Interest expense.............. $110,833 $ 90,130 $100,226 $102,983 $ 87,071
Capitalized interest.......... 993 991 1,789 693 285
Appropriate portion of
rents(b)..................... 16,262 17,665 19,527 19,450 16,224
-------- -------- -------- -------- --------
Fixed charges................. $128,088 $108,786 $121,542 $123,126 $103,580
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges...................... 4.62X 4.90X 5.40X 5.09X 4.49X
======== ======== ======== ======== ========
</TABLE>
- --------
(a) The ratio of earnings to fixed charges for 1994 through 1997 has been
restated for the effects of the March 1997 merger of Tyco Toys, Inc.
("Tyco") into Mattel, which was accounted for as a pooling of interests.
(b) Portion of rental expenses which is deemed representative of an interest
factor, not to exceed one-third of total rental expense.
<PAGE>
EXHIBIT 12.0
(Page 2 of 2)
MATTEL, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(Amounts in thousands, except ratios)
<TABLE>
<CAPTION>
For the Years Ended December 31,(a)
-----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings Available for Fixed
Charges:
Income before income taxes,
cumulative effect of changes
in accounting principles and
extraordinary items.......... $465,063 $425,082 $536,756 $504,668 $362,157
Less (plus) minority interest
and undistributed income
(loss) of less-than-majority-
owned affiliates, net........ (165) (144) 303 (36) (649)
Add:
Interest expense............ 110,833 90,130 100,226 102,983 87,071
Appropriate portion of
rents(b)................... 16,262 17,665 19,527 19,450 16,224
-------- -------- -------- -------- --------
Earnings available for fixed
charges...................... $591,993 $532,733 $656,812 $627,065 $464,803
======== ======== ======== ======== ========
Fixed Charges:
Interest expense.............. $110,833 $ 90,130 $100,226 $102,983 $ 87,071
Capitalized interest.......... 993 991 1,789 693 285
Dividends--Series B preferred
stock........................ -- 2,537 3,406 3,200 2,157
Dividends--Series C preferred
stock........................ 7,960 7,968 3,985 -- --
Dividends--Series F preference
stock........................ -- -- -- 3,342 4,689
Appropriate portion of rents
(b).......................... 16,262 17,665 19,527 19,450 16,224
-------- -------- -------- -------- --------
Fixed charges................. $136,048 $119,291 $128,933 $129,668 $110,426
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges...................... 4.35X 4.47X 5.09X 4.84X 4.21X
======== ======== ======== ======== ========
</TABLE>
- --------
(a) The ratio of earnings to combined fixed charges and preferred stock
dividends for 1994 through 1997 has been restated for the effects of the
March 1997 merger of Tyco into Mattel, which was accounted for as a
pooling of interests.
(b) Portion of rental expenses which is deemed representative of an interest
factor, not to exceed one-third of total rental expense.
<PAGE>
EXHIBIT 13.0
Mattel, Inc. 1998 Annual Report 24
Financial Information
- -------------------------------------------------------------------------------
Five-Year Summary 25
Management's Discussion and 26
Analysis of Financial Condition
And Results of Operations
Consolidated Financial Statements 33
Notes to Consolidated 37
Financial Statements
Management Report on Responsibility 52
for Financial Reporting
Report of Independent Accountants 52
<PAGE>
Mattel, Inc. and Subsidiaries 25
Five-Year Financial Summary
- --------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31 (a)
------------------------------------------------------------
(In thousands, except per share and percentage information) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Net sales $4,781,892 $4,834,616 $4,535,332 $4,369,816 $3,971,226
Gross profit 2,362,993 2,400,000 2,219,758 2,067,740 1,881,060
% of net sales 49% 50% 49% 47% 47%
Operating profit (b) 575,896 515,212 636,982 607,651 449,228
% of net sales 12% 11% 14% 14% 11%
Income before income taxes and extraordinary item 465,063 425,082 536,756 504,668 362,157
Provision for income taxes 132,799 135,288 164,532 166,779 137,487
Income before extraordinary item 332,264 289,794 372,224 337,889 224,670
Extraordinary item - loss on early retirement of debt - (4,610) - - -
Net income 332,264 285,184 372,224 337,889 224,670
Income Per Common Share (c):
Income before extraordinary item
Basic 1.11 0.96 1.26 1.13 0.74
Diluted 1.10 0.94 1.23 1.11 0.73
Net income
Basic 1.11 0.95 1.26 1.13 0.74
Diluted 1.10 0.93 1.23 1.11 0.73
Dividends Declared Per Common Share (c) 0.31 0.27 0.24 0.19 0.15
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As of Year End (a)
------------------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Position:
Cash and marketable securities $ 212,454 $ 694,947 $ 550,271 $ 511,061 $ 290,157
Accounts receivable, net 983,050 1,091,416 948,940 886,344 990,346
Inventories 584,358 428,844 444,178 407,551 405,427
Total assets 4,262,165 3,803,791 3,581,142 3,341,370 3,150,438
Short-term borrowings 134,006 17,468 28,924 76,443 57,531
Long-term liabilities 1,124,756 808,297 633,342 721,739 606,430
Stockholders' equity 1,820,198 1,822,070 1,805,923 1,551,680 1,385,777
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Consolidated financial information for 1994-1997 has been restated
retroactively for the effects of the March 1997 merger with Tyco Toys, Inc.
("Tyco"), accounted for as a pooling of interests.
(b) Represents income from operations before interest expense and provision for
income taxes. In 1998, operating profit was reduced by a nonrecurring charge
of $38.0 million related to a voluntary recall of certain Power Wheels(R),
ride-on vehicles and a one-time charge of $6.0 million in connection with
the proposed Toys R Us-related antitrust litigation settlement. In 1997,
operating profit was reduced by a nonrecurring charge of $275.0 million for
transaction, integration and restructuring costs related to the merger with
Tyco. In 1996, operating profit was reduced by a nonrecurring charge of
$21.8 million related to the accounting for certain royalties and
participation fees in prior periods. In 1995, operating profit was reduced
by a nonrecurring charge of $8.9 million related to a restructuring program
implemented to reduce operating expenses at certain of Tyco's business
units. In 1994, operating profit was reduced by a nonrecurring charge of
$76.7 million principally related to the consolidation of manufacturing
operations and the reduction of headquarters expense and support functions
worldwide.
(c) Per share data reflect the retroactive effect of stock splits distributed to
stockholders in March 1996, January 1995 and January 1994, and the 1997
merger with Tyco.
<PAGE>
Mattel, Inc. and Subsidiaries 26
Management's Discussion and Analysis of
- --------------------------------------------------------------------------------
Financial Condition and Results of Operations
Cautionary Statement
Certain expectations and projections regarding the future performance of Mattel,
Inc. and its subsidiaries ("Mattel" or the "Company") discussed in this annual
report are forward-looking and are made under the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. These expectations and
projections are based on currently available competitive, financial, and
economic data along with the Company's operating plans and are subject to
certain future events and uncertainties. Forward-looking statements can be
identified by the use of forward-looking terminology, such as may, will, should,
expect, anticipate, estimate, continue, plans, intends or other similar
terminology. Management cautions you that the following factors, among others,
could cause the Company's actual consolidated results of operations and
financial position in 1999 and thereafter to differ significantly from those
expressed in forward-looking statements:
Marketplace Risks
- - Increased competitive pressure, both domestically and internationally,
which may affect the sales of the Company's products
- - Significant changes in the buying patterns of major customers, such as the
recent shift by some retailers to just-in-time inventory management, which may
limit the Company's ability to accurately forecast reorders or cause a
decrease in sales after related expenses have already been incurred
- - Dependence on the timely development, introduction and customer
acceptance of new products, which may affect the Company's ability to
successfully redesign, restyle and extend existing core products and
product lines and to successfully bring new products to market
- - Possible weaknesses in economic conditions, both domestically and
internationally, which may affect the sales of the Company's products and
the costs associated with manufacturing and distributing these products
Financing Considerations
- - Currency fluctuations, which may affect the Company's reportable income
- - Significant changes in interest rates, both domestically and
internationally, which may affect the Company's cost of financing both its
operations and investments
Merger-Related Risks
- - Difficulty integrating the operations of The Learning Company, Inc. into the
Company following the proposed merger, which may impede the Company's ability
to achieve savings or operating synergies from the merger
Year 2000 Compliance
- - Potential inability of computer systems or software products used by the
Company and/or its customers and suppliers to properly recognize and process
date-sensitive information beyond January 1, 2000, which may result in an
interruption in normal business operations of the Company, its suppliers and
customers
Other Risks
- - Inability to achieve cost savings expected as part of restructuring
activities, which may result in higher than expected costs following such
restructurings
- - Development of new technologies, including the Internet, which may create new
risks to the Company's ability to protect its intellectual property rights
- - Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products or environmental activities or
trade restrictions, which may lead to increased costs or interruption in
normal business operations of the Company
- - Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal business
operations of the Company
Summary
You should read this analysis in conjunction with the Company's consolidated
financial statements that begin on page 33.
Mattel designs, manufactures, and markets a broad variety of
children's products on a worldwide basis through both sales to retailers
and direct to consumers. The Company's business is dependent in great part
on its ability each year to redesign, restyle and extend existing core
products and product lines, to design and develop innovative new products
and product lines, and to expand its marketing capability.
The Company plans to continue to focus on its portfolio of brands
that have fundamental play patterns and have historically had worldwide
appeal, have been sustainable, and have delivered consistent profitability.
The Company's portfolio of brands can be grouped in the following four
categories:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
software, Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R), and Polly
Pocket(R)
Infant and Preschool - including Fisher-Price(R), Disney preschool and plush,
Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna Doodle(R), and
View-Master(R)
Entertainment - including Disney, Nickelodeon(R), games, and puzzles
Wheels - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and
Tyco(R) Radio Control
Results of Operations
The following is a percentage analysis of operating results for the past
three years:
<TABLE>
<CAPTION>
For the Year
-------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
- -----------------------------------------------------------------------------------------------------
Gross profit 49.4% 49.6% 48.9%
Advertising and promotion expenses 17.0 16.1 17.2
Other selling and administrative expenses 18.5 16.5 17.0
Amortization of intangibles 0.9 0.6 0.7
Restructuring and integration charges - 5.7 -
Special charges 0.9 - -
Other expense (income), net 0.1 - -
- -----------------------------------------------------------------------------------------------------
Operating profit 12.0 10.7 14.0
Interest expense 2.3 1.9 2.2
- -----------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 9.7% 8.8% 11.8%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Mattel, Inc. and Subsidiaries 27
1998 Compared to 1997
Net income for 1998 was $332.3 million or $1.10 per diluted share as compared to
$285.2 million or $0.93 per diluted share in 1997. 1998 net income was impacted
by a $27.2 million after-tax charge ($0.09 per diluted share) related to a
voluntary recall of certain Power Wheels(R) ride-on vehicles and a one-time
charge of $4.3 million after taxes ($0.01 per diluted share) in connection with
the proposed Toys R Us-related antitrust litigation settlement. Net sales for
1998 reached $4.78 billion, a decrease of 1% from $4.83 billion in 1997.
Cutbacks in purchases by retailers to adjust to a just-in-time buying pattern
negatively impacted sales. Sales in the Girls category decreased 4% largely due
to a 14% decline in Barbie(R) products, as a result of high retail inventory
levels entering 1998. As a result of the Pleasant Company acquisition in July
1998, the American Girl(R) brand contributed $213.2 million in gross sales,
which helped to partially offset the decline in Barbie(R). Sales in the Infant
and Preschool category decreased 3%, largely attributable to declines in Sesame
Street(R) and Fisher-Price(R) products, partially offset by an increase in
Disney's Winnie the Pooh(R). Sales in the Wheels category grew 21%, reflecting
growth in both Hot Wheels(R) and Matchbox(R) vehicles and playsets. Sales in the
Entertainment category, which includes Disney and Nickelodeon(R), increased 14%
largely due to this year's introduction of toys associated with the feature
motion pictures "A Bug's Life" and "The Rugrats Movie".
Sales to customers within the US declined 2% and accounted for 66% of
consolidated gross sales in both 1998 and 1997. Sales to customers outside the
US were down 1%, including an unfavorable foreign exchange effect of
approximately $30 million due to the generally stronger US dollar relative to
1997. At comparable foreign exchange rates, sales internationally grew 1%.
Gross profit as a percentage of net sales remained relatively constant at
49.4% compared to 49.6% in 1997. As a percentage of net sales, advertising and
promotion expenses increased approximately one percentage point to 17.0%, and
selling and administrative expenses increased two percentage points to 18.5%.
Both these ratios increased relative to last year as a result of unanticipated
cutbacks in buying by retailers due to a continuing shift by these retailers to
just-in-time inventory management. To respond to such shifts, the Company took
appropriate actions to adjust its own shipping to more of a just-in-time
pattern. As a result, products that would have previously been shipped in
December will be shipped closer to the time that they will be purchased by the
consumer. The Company plans to manage its advertising and selling and
administrative levels in 1999 to bring them back in line with its historical
ratios. Amortization of intangibles increased by $9.8 million, mainly due to the
amortization of goodwill in connection with the 1998 acquisitions of Pleasant
Company and Bluebird Toys PLC ("Bluebird").
Interest expense increased $20.7 million primarily due to increased short-
and long-term borrowings to finance the Company's 1998 acquisitions of Pleasant
Company and Bluebird.
1997 Compared to 1996
Net income for 1997 was $285.2 million or $0.93 per diluted share as compared to
$372.2 million or $1.23 per diluted share in 1996. 1997 net income was impacted
by a $209.7 million after-tax charge ($0.71 per diluted share) related to a
nonrecurring charge for transaction, integration and restructuring costs related
to the Mattel restructuring and Tyco integration, and an extraordinary loss of
$4.6 million net of taxes ($0.01 per diluted share) for the early retirement of
debt assumed as part of the Tyco merger. Net sales for 1997 were $4.83 billion,
an increase of 7% from $4.54 billion in 1996. Sales growth included a $138.5
million unfavorable foreign exchange effect from the generally stronger US
dollar relative to 1996. Sales in the Girls category grew 4% due to the strength
in Barbie(R) and Barbie(R)-related products, partially offset by declines in
large and small dolls. Sales in the Infant and Preschool category increased 15%,
led by strength in Sesame Street(R) and Disney's Winnie the Pooh(R), partially
offset by a decline in Fisher-Price(R) products. The Wheels category increased
21%, driven by an increase in Hot Wheels(R). Sales in the Entertainment
category, which includes Disney and Nickelodeon(R), decreased 4%.
Sales to customers within the US grew 14% and accounted for 66% of
consolidated gross sales in 1997 compared to 62% in 1996. Sales to customers
outside the US decreased 5%, including the unfavorable foreign exchange effect
of the generally stronger US dollar relative to the prior year. At comparable
foreign exchange rates, sales internationally grew 3%.
Gross profit as a percentage of net sales increased to 49.6% from 48.9%,
principally due to improved product mix. As a percentage of net sales,
advertising and promotion expenses decreased approximately one percentage point
to 16.1%, primarily due to cost savings realized from the Company's merger with
Tyco. As a percentage of net sales, other selling and administrative expenses
decreased to 16.5% from 17.0%, reflecting the impact of the Company's effort to
control costs and direct cost savings realized from the 1997 Tyco integration
and Mattel restructuring plan.
Interest expense decreased $10.1 million largely due to lower average
domestic short-term borrowings during 1997.
Income Taxes
The effective income tax rate was approximately 29% in 1998 compared to 32% in
1997 and 31% in 1996. The effective tax rate decreased in 1998 due to an
increase in income earned in locations with lower tax rates and a reduction in
restructuring expenses without income tax benefits.
Pre-tax income earned from US operations as a percentage of the
consolidated pre-tax income is less than the sales to US customers as a
percentage of the consolidated gross sales. This difference results from
corporate headquarters expenses incurred n the US that decreased US pre-tax
income and from profits from foreign manufacturing activities that relate to
sales ultimately made to US customers.
Financial Position
The Company's financial position remained strong in 1998 primarily due to
its profitable operating results. At December 31, 1998, the Company's cash
position was $212.4 million, compared to $694.9 million as of the end of
1997. Cash decreased $482.5 million primarily due to cash consideration
paid in connection with the acquisitions of Pleasant Company and Bluebird.
Accounts receivable decreased $108.4 million to $983.1 million due to lower
orders by major
<PAGE>
Mattel, Inc. and Subsidiaries 28
retailers in fourth quarter 1998. Inventories increased $155.5 million to $584.4
million, reflecting the sales shortfall in the 1998 fourth quarter and the
addition of Pleasant Company inventory. Property, plant and equipment, net grew
$134.9 million to $736.5 million due to assets acquired as part of the
acquisition of Pleasant Company and investments in the expansion of the
Company's manufacturing facilities located in Mexico and Asia. Intangibles
increased $719.4 million to nearly $1.25 billion due to goodwill generated from
the Pleasant Company and Bluebird acquisitions.
Short-term borrowings increased $116.5 million compared to 1997 from
financing the acquisitions of Pleasant Company and Bluebird. Current portion of
long-term liabilities increased $19.9 million primarily due to the
reclassification of $30.0 million in medium-term notes payable in 1999 from
long-term debt.
A summary of the Company's capitalization is as follows:
<TABLE>
<CAPTION>
As of Year End
-----------------------------------
(In millions) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Medium-term notes $ 540.5 18% $ 520.5 20%
Senior notes 400.0 14 100.0 4
Other long-term debt obligations 43.0 1 55.0 2
- -------------------------------------------------------------------------
Total long-term debt 983.5 33 675.5 26
Other long-term liabilities 141.3 5 132.8 5
Stockholders' equity 1,820.2 62 1,822.1 69
- -------------------------------------------------------------------------
$2,945.0 100% $2,630.4 100%
- -------------------------------------------------------------------------
</TABLE>
Total long-term debt increased $308.0 million mainly due to the issuance of
$300.0 million of senior notes to finance the acquisitions of Pleasant Company
and Bluebird. Medium-term notes increased by $20.0 million due to the issuance
of $50.0 million in notes, partially offset by the reclassification of $30.0
million payable in 1999 to current portion of long-term debt. The Company
expects to satisfy its future long-term capital needs through the retention of
corporate earnings and the issuance of long-term debt instruments. In November
1998, the Company filed its current universal shelf registration statement
allowing it to issue up to $400.0 million of debt and equity securities, all of
which was available to be issued as of December 31, 1998. Stockholders' equity
of $1.8 billion remained consistent with 1997 as a result of treasury stock
purchases and dividend declarations on common and preferred stock, which were
largely offset by profitable operating results and reissuance of treasury stock
for the exercise of nonqualified stock options by the Company's employees.
Liquidity
The Company's primary sources of liquidity over the last three years have
been cash on hand at the beginning of the year, cash flows generated from
operations, long-term debt issuances and short-term seasonal borrowings.
Profitable operating activities generated cash flows of $547.5 million
during 1998, compared to $481.9 million in 1997 and $524.8 million in 1996.
The Company invested its cash flows during the last three years in
the acquisitions of Pleasant Company and Bluebird, additions to tooling in
support of new products, and construction of new manufacturing facilities.
The Company received cash flows from the issuance of senior notes
in 1998 and medium-term notes in 1998 and 1997. Cash received from these
debt issuances was used to fund the acquisitions of Pleasant Company and
Bluebird, to retire higher-cost debt and to support operating activities.
In 1998, the Company repaid the long-term debt and mortgage note assumed as
part of the Pleasant Company acquisition. In 1997, the Company redeemed
the 10-1/8% notes assumed as part of the acquisition of Tyco and repaid its
6-7/8% senior notes upon maturity. Cash was also spent during the last
three years to purchase treasury stock to provide shares for issuance under
the Company's employee stock option plans and the exercise of outstanding
warrants. In addition, over the last three years, the Company has
consistently increased its cash payments for common dividends.
Seasonal Financing
The Company expects to finance its seasonal working capital requirements for the
coming year by using existing and internally generated cash, issuing commercial
paper, selling certain trade receivables and using various short-term bank lines
of credit. The Company's domestic committed unsecured credit facility provides
$1.0 billion in short-term borrowings from a commercial bank group. This
facility provides for up to $700.0 million in advances and backup for commercial
paper issuances, and up to an additional $300.0 million for nonrecourse
purchases of certain trade accounts receivable by the bank group over the next
four years. Under its domestic credit facility, the Company is required to meet
financial covenants for consolidated debt-to-capital and interest coverage.
Currently the Company is in compliance with such covenants.
The Company also expects to have approximately $370 million of individual
short-term foreign credit lines with a number of banks available in 1999, which
will be used as needed to finance seasonal working capital requirements of
certain foreign affiliates.
Pending Business Combination
In December 1998, Mattel and The Learning Company entered into a merger
agreement. The stock-for-stock transaction is subject to approval by the
stockholders of both Mattel and The Learning Company and by certain regulatory
agencies. The merger will be accounted for as a pooling of interests, which
means that for accounting and financial reporting purposes, Mattel and The
Learning Company will treat their companies as if they had always been combined.
The combined company will likely incur transaction costs of approximately $75
million to $85 million, including investment banking, legal and accounting fees,
and contractual incentive benefits. Management believes the merger will be
completed in the second quarter of 1999. The number of shares of Mattel common
stock to be issued to The Learning Company's common and preferred stockholders,
together with the Mattel common stock to be issued upon the exchange of the
exchangeable shares of The Learning Company's Canadian subsidiary, is expected
to represent between approximately 27% and 30% of Mattel's outstanding voting
power after the merger, depending on the actual exchange ratio at the time of
the merger.
<PAGE>
Mattel, Inc. and Subsidiaries 29
Acquisitions
During 1998, the Company acquired Pleasant Company and Bluebird. These
acquisitions were accounted for using the purchase method of accounting, which
means that the results of operations of the acquired companies have been
included in Mattel's consolidated financial statements from their respective
dates of acquisition. Proforma financial information for these acquisitions has
not been presented since they did not meet the test of significance individually
or in the aggregate.
In July 1998, the Company completed its acquisition of Pleasant Company, a
Wisconsin-based direct marketer of books, dolls, clothing, accessories, and
activity products included under the American Girl(R) brand name. The Company
paid approximately $715 million, including investment advisor and other costs
directly related to the acquisition. The excess of cost over the estimated fair
market value of tangible net assets acquired was approximately $690 million.
Total excess has been allocated to customer lists, a covenant not-to-compete,
and magazine subscription lists that are being amortized on a straight-line
basis over a 3 to 15 year period, with the remaining excess being amortized on a
straight-line basis over 40 years.
In June 1998, the Company acquired Bluebird, a company organized in the
United Kingdom, from which Mattel previously licensed the product designs for
the Polly Pocket(R) and Disney Tiny Collections brands, as well as the Polly
Pocket(R) trademarks. The Company paid approximately $80 million, which included
investment advisor and other directly related expenses. Intercompany accounts
and transactions between Mattel and Bluebird have been eliminated from the
consolidated financial statements. The excess of cost over the estimated fair
market value of tangible net assets acquired was approximately $60 million,
which is being amortized on a straight-line basis over 40 years.
Business Combination and Related Integration and Restructuring Charge
In March 1997, the Company completed its merger with Tyco. The merger was
accounted for as a pooling of interests, which means that for accounting and
financial reporting purposes, Mattel's consolidated financial statements have
been restated to present the combined companies' financial position and results
of operations for 1996 through 1997. Under the merger agreement, each Tyco
common stockholder received 0.48876 shares of Mattel common stock for each share
of Tyco common stock outstanding, which resulted in the issuance of
approximately 17 million Mattel common shares. Each share of Tyco Series B and
Series C preferred stock was converted into like Mattel preferred stock.
In connection with this merger, the Company commenced an integration and
restructuring plan and recorded a $275.0 million pre-tax charge against
operations in March 1997. After related tax effects, the Company's 1997 earnings
were impacted by $0.71 per diluted share as a result of the net $209.7 million
charge. The integration and restructuring activity was substantially complete as
of December 31, 1998. The Company realized annualized cost savings of
approximately $160 million, mainly in the areas of cost of production,
advertising, selling and administrative expenses, and financing costs.
Special Charges
In the 1998 third quarter, the Company voluntarily recalled certain Power
Wheels(R) ride-on vehicles and recognized a $38.0 million pre-tax charge in its
results of operations. After related tax effects, the net $27.2 million charge
impacted the 1998 earnings by $0.09 per diluted share. The recall did not result
from any serious injury, and involves the replacement of electronic components
that may overheat, particularly when consumers make alterations to the product.
The Company believes the amount reserved will be sufficient to cover all costs
associated with the recall.
In the 1998 fourth quarter, the Company recognized a $6.0 million pre-tax
charge related to the proposed settlement of the Toys R Us-related antitrust
litigation. After related tax effects, the net $4.3 million charge impacted the
1998 earnings by $0.01 per diluted share. The Company is required to make cash
and toy contributions prior to November 1999 according to the terms of the
proposed settlement agreement.
Litigation
- - Beaverton, Oregon
The Company operates a manufacturing facility on a leased property in Beaverton,
Oregon that was acquired as part of its merger with Tyco. In March 1998, samples
of groundwater used by the facility for process water and drinking water
disclosed elevated levels of certain chemicals, including trichloroethylene
("TCE"). The Company immediately closed the water supply and self-reported the
sample results to the Oregon Department of Environmental Quality ("DEQ") and the
Oregon Health Division. The Company also implemented an employee communication
and medical screening program.
In November 1998, the Company and another potentially responsible
party entered into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the site, to propose an interim remedial
action measure and to continue the community outreach program to employees,
former employees and surrounding landowners. It is not presently possible
to estimate the cost to the Company related to the DEQ's investigation and
any subsequent orders for future work.
- - Toys R Us
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc. The
administrative law judge made findings of fact and conclusions of law that the
toy retailer Toys R Us, Inc. had violated federal antitrust laws and entered
into vertical and horizontal arrangements with various toy manufacturers,
including Mattel, whereby the manufacturers would refuse to do business with
warehouse clubs, or would do business with warehouse clubs only on terms
acceptable to Toys R Us. On October 13, 1998, the Federal Trade Commission
issued an opinion and a final order affirming the findings and conclusions of
the administrative law judge. Toys R Us has now filed a notice of appeal in the
United States Court of Appeals for the Seventh Circuit.
Following the announcement of the administrative law judge's decision, the
Company was named as a defendant, along with certain other toy manufacturers, in
a number of antitrust actions in various
<PAGE>
Mattel, Inc. Subsidiaries 30
states related to the Toys R Us matter. The Company has also been named as a
defendant in a series of private treble damage class actions under federal
antitrust laws that have been filed in various federal district courts.
Since May 1998, the Company has participated in settlement negotiations
being conducted with the aid of a mediator. In connection with a proposed
settlement, the Company recognized a $6.0 million pre-tax charge in the fourth
quarter of 1998. After related tax effects, the net $4.3 million charge impacted
the Company's 1998 earnings by $0.01 per diluted share. The proposed settlement
agreement calls for the Company to make cash and toy contributions prior to
November 1999. Until such time as these matters are concluded in the various
courts involved, the Company intends to vigorously defend itself in the
litigation in which it was named involving Toys R Us.
- - Greenwald
On October 13, 1995, Michelle Greenwald filed a complaint against the Company in
Superior Court of the State of California, County of Los Angeles. Ms. Greenwald
is a former employee whom the Company terminated in July 1995. Her complaint
sought $50 million in general and special damages, plus punitive damages, for
breach of oral, written and implied contract, wrongful termination in violation
of public policy and violation of California Labor Code Section 970. Ms.
Greenwald claimed that her termination resulted from complaints she made to
management concerning general allegations that the Company did not properly
account for sales and certain costs associated with sales and more specific
allegations that the Company failed to properly account for certain royalty
obligations to The Walt Disney Company. During 1996 and 1997, the Company filed
motions for summary judgment on all areas of her complaint and these motions
were granted. In 1998, Ms. Greenwald filed a notice of appeal, which is
scheduled to be considered in March 1999. The Company intends to defend the
action vigorously, including her appeal.
- - Pending Business Combination
During December 1998, a total of six separate purported class action complaints
were filed by several stockholders of The Learning Company in the Court of
Chancery of the State of Delaware in and for New Castle County against The
Learning Company and its board of directors for alleged breaches of fiduciary
duties in connection with the proposed merger. The six complaints have since
been consolidated. The consolidated complaint seeks the certification as a class
of all The Learning Company stockholders, an injunction against the merger,
rescission if the merger is consummated, damages, costs and disbursements,
including attorneys' fees. The consolidated complaint alleges that The Learning
Company board of directors breached their fiduciary duties to The Learning
Company's stockholders by, among other things, failing to conduct due diligence
sufficient to have discovered material, adverse information concerning Mattel's
anticipated operational and financial results and agreeing to an exchange ratio
that failed to protect The Learning Company stockholders against a decline in
the value of Mattel common stock. The consolidated complaint names Mattel as an
additional defendant, claiming that Mattel aided and abetted the alleged
breaches of fiduciary duty. Mattel will aggressively defend itself against the
action and will continue to pursue the merger.
- - Other Matters
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability, labor, and
environmental cleanup, which the Company is addressing or defending in the
ordinary course of business. Management believes that any liability, which may
potentially result upon resolution of such matters, will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Commitments
In the normal course of business, the Company enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect the Company's right to create and
market certain products. These arrangements include commitments for future
inventory purchases and royalty payments. Certain of these commitments routinely
contain provisions for guaranteed or minimum expenditures during the term of the
contracts.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million. Licensing and similar
agreements with terms extending through the year 2003 contain provisions for
future guaranteed minimum payments aggregating approximately $371 million. In
addition, under a certain licensing agreement, the Company may have additional
commitments of up to $37.8 million in the year 2000 payable over three years.
Foreign Currency Risk
The Company's results of operations and cash flows can be impacted by exchange
rate fluctuations. To limit the exposure associated with exchange rate
movements, the Company enters into foreign currency forward exchange and option
contracts primarily to hedge its purchase of inventory, sales and other
intercompany transactions denominated in foreign currencies. The Company's
results of operations can also be affected by the translation of foreign
revenues and earnings into US dollars.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. The Company seeks to mitigate its exposure to market
risk by monitoring its currency exchange exposure for the year and partially or
fully hedging such exposure. In addition, the Company manages its exposure
through the selection of currencies used for foreign borrowings and intercompany
invoicing. The Company does not trade in financial instruments for speculative
purposes.
The Company's foreign currency forward exchange contracts that were used to
hedge firm foreign currency commitments as of December 31, 1998 and 1997 are
shown in the following table.
These contracts generally mature within 18 months from the date of
execution. Contracts outstanding at year-end mature during the next 13 months.
All contracts are against the US dollar and are maintained by reporting units
with a US dollar functional currency, with the exception of the Indonesian
rupiah contracts that are maintained by an entity with a rupiah functional
currency.
<PAGE>
Mattel, Inc. and Subsidiaries 31
For the purchase of foreign currencies, fair value reflects the amount,
based on dealer quotes, that the Company would pay at maturity for contracts
involving the same currencies and maturity dates, if they had been entered into
as of year-end 1998 and 1997. For the sale of foreign currencies, fair value
reflects the amount, based on dealer quotes, that the Company would receive at
maturity for contracts involving the same currencies and maturity dates, if they
had been entered into as of year-end 1998 and 1997. The differences between the
fair value and the contract amounts are expected to be fully offset by foreign
currency exchange gains and losses on the underlying hedged transactions.
<TABLE>
<CAPTION>
Buy Sell
----------------------------------- -----------------------------------
Weighted Weighted
Contract Average Fair Contract Average Fair
(In thousands of US dollars) Amount Contract Rate Value Amount Contract Rate Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
German marks $ 19,119 1.67 $ 18,984 $144,660 1.68 $145,688
Italian lira 20,014 1,764.00 21,155 68,358 1,660.00 67,950
Hong Kong dollars 55,829 8.02 57,790 - - -
French francs 27,435 5.62 27,536 9,105 5.82 9,479
British pounds sterling 6,548 0.60 6,415 66,856 0.61 66,950
Canadian dollars 16,144 1.55 16,545 18,794 1.46 18,119
Spanish pesetas 5,625 142.30 5,577 2,899 148.23 2,997
Dutch guilders 5,079 1.89 5,050 8,086 1.96 8,342
Japanese yen - - - 12,501 116.00 12,759
Australian dollars 4,988 1.66 5,268 21,610 1.58 21,732
Belgian francs - - - 11,641 35.46 11,871
Swiss francs 18,341 1.37 18,251 - - -
Mexican peso - - - 22,000 10.02 21,956
Indonesian rupiah 10,000 15,720.50 19,183 - - -
Singapore dollar - - - 3,962 1.64 3,943
Brazilian real - - - 2,500 1.25 2,554
- -----------------------------------------------------------------------------------------------------------
$189,122 $201,754 $392,972 $394,340
- -----------------------------------------------------------------------------------------------------------
1997
German marks $ 19,179 1.78 $ 18,972 $ 65,119 1.77 $ 64,941
Italian lira 38,277 1,800.00 39,203 53,161 1,749.00 52,585
Malaysian ringitts 53,304 3.08 41,551 - - -
Hong Kong dollars 148,084 8.04 149,108 2,527 7.76 2,532
French francs - - - 38,166 5.86 37,639
British pounds sterling 32,548 0.61 32,751 72,580 0.63 73,570
Canadian dollars 22,608 1.42 22,474 - - -
Spanish pesetas - - - 13,858 148.99 13,668
Dutch guilders 12,778 2.00 12,666 36,285 1.96 35,719
Japanese yen - - - 7,956 125.73 7,659
Australian dollars 6,398 1.54 6,391 - - -
Belgian francs - - - 55,126 36.48 54,515
Swiss francs 13,677 1.44 13,454 - - -
Mexican peso - - - 4,200 8.05 4,138
Indonesian rupiah 15,230 3,930.78 9,891 - - -
Singapore dollar - - - 4,107 1.72 4,203
- -----------------------------------------------------------------------------------------------------------
$362,083 $346,461 $353,085 $351,169
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company did not enter into any new foreign currency option contracts
during 1998, and no option contracts remained outstanding as of December 31,
1998. As of December 31, 1997, the total amount of the option contracts was
$93.5 million and the fair value was $90.5 million. Fair value reflects the
amount of US dollars the Company would receive from the current contracts, less
the option value. The option value is determined based on dealer quotes for
contracts involving the same currencies and maturity dates.
Euro
The Treaty on European Economic and Monetary Union provides for the introduction
of a single European currency, the Euro, in substitution for the national
currencies of the member states of the European Union that adopt the Euro. The
transition period for member states joining the Monetary Union began on January
1, 1999 and will end on July 1, 2002 when the national currencies of member
states will cease to exist. Currently, the Company is unable to assess whether
the adoption of the Euro by the Monetary Union will have a material impact on
its financial position or results of operations in the future.
Manufacturing Risk
The Company owns and operates manufacturing facilities and utilizes third-party
manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and
Thailand. A risk of political instability and civil unrest exists in these
countries, which could temporarily or permanently damage the Company's
manufacturing operations located there. The Company's business, financial
position and results of operations would be negatively impacted by a significant
disruption to its manufacturing operations or suppliers.
Effects of Inflation
Inflation rates in the US and in major foreign countries where the Company does
business have not had a significant impact on its results of operations or
financial position during the three years
<PAGE>
Mattel, Inc. and Subsidiaries 32
ended December 31, 1998. The US Consumer Price Index increased 1.6% in 1998,
1.7% in 1997 and 3.3% in 1996. The Company receives some protection from the
impact of inflation from high turnover of inventories and its ability to pass on
higher prices to consumers.
Year 2000 Update
Many currently installed computer systems and software products, including
several used by the Company, are coded to accept only two-digit (rather than
four-digit) entries in the date code field used to define the applicable year.
In such instances, the first two characters are assumed to be "19". Beginning in
the year 2000 or perhaps earlier if referencing a date in the year 2000, such
computer systems and software products may recognize a date using "00" as the
year 1900, rather than the year 2000, which could result in miscalculations or
system failures. To address the year 2000 issue, in early 1998 the Company
established a project team and initiated a comprehensive plan that is designed
to assess, remediate and test Mattel's internal systems, hardware and processes,
including key operational, manufacturing and financial systems. The progress of
this plan is continually monitored and regularly reported to management. In
addition, the Company's board of directors is regularly informed about the year
2000 issue both generally and as it may affect the Company's business.
The Company's internal year 2000 project team oversees all aspects of
implementing the plan. The team is comprised of staff members from the
information systems department having the requisite knowledge of the Company's
computer systems, including all the technical aspects of the systems. Key user
group designees from business areas are included on each system team, which is
guided by a central project team. The Company does not plan on engaging outside
consultants, technicians or other external resources to assist in formulating
and implementing the program.
The Company's plan adheres to a multi-step process that includes five
distinct phases of activity: (1) awareness; (2) inventory and risk assessment;
(3) code and system modification; (4) testing; and (5) contingency planning.
Under the first two phases of the plan, all operational, manufacturing and
financial systems were inventoried and evaluated. This inventory included all
software systems, computer hardware, facilities, and production equipment
containing or depending upon a computer chip. As a result of such evaluation,
the Company established detailed plans and action steps required to address all
aspects of the year 2000 issue, including all code and system modifications
(phase 3). The Company has completed the awareness, inventory and code change
phases of the plan as scheduled prior to December 1998. Critical system
verification and testing (phase 4) is expected to be complete by July 1999.
The Company initiated formal communications with each of its significant
suppliers and customers to determine the extent to which they are addressing the
year 2000 issue and the effect on its business should those parties fail to
adequately address the issue. To date, the Company has received responses from
the majority of the initial contacts. These responses have been positive and
support the overall initiatives toward achieving year 2000 compliance. The
Company is actively following-up with those customers and suppliers failing to
reply to the initial inquiry.
Due to the general uncertainty inherent in the year 2000 issue, largely
resulting from uncertainty of the readiness of third-party suppliers and
customers, the Company is currently unable to assess the overall impact on its
business. The risk of third-party suppliers and customers not correcting a
material year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations of such suppliers, customers,
and/or the Company. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial position. As a result,
during the first half of 1999 the Company is developing contingency plans (phase
5), which it expects to be complete by July 1999. Contingency planning is being
done on a worldwide basis by all the business units. Each unit will concentrate
on factors external to the Company which may adversely impact their ability to
conduct operations. Specifically, for those locations where a high likelihood of
a material failure exists, the Company will establish revised procedures for
managing operations, including identification of alternate suppliers and vendors
whose systems are year 2000 compliant.
While there is no guarantee, management believes that the Company's year
2000 plan should greatly reduce its level of uncertainty about the issue and
mitigate the possibility of significant interruptions of ongoing operations.
Additionally, its global presence and broad-based manufacturing capability
should provide the Company with numerous options to further mitigate the risk of
year 2000 non-compliance.
As of December 31, 1998, the Company has spent approximately $6 million and
expects to incur a total of approximately $10 million in connection with
addressing the year 2000 issue. These costs are largely due to the use of
internal resources dedicated to achieving year 2000 compliance. Costs are
charged to expense as they are incurred. Work on the year 2000 issue has not
delayed any internal projects that would have a material effect on the Company's
consolidated financial position or results of operation. All costs of addressing
the year 2000 issue will be funded from internally generated cash.
The Company sells software products as part of its core businesses. All
software products currently available for sale to consumers and those products
previously purchased by consumers are year 2000 compliant. Software products
manufactured for the Company by third-parties under licensing agreements have
been certified as year 2000 compliant by such manufacturers. The Company will
continue to ensure that all its software products in development are year 2000
compliant.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The Company is required to adopt this
statement for its fiscal year beginning January 1, 2000. Management believes the
adoption of this statement will not have a material impact on the Company's
consolidated financial position or results of operations.
<PAGE>
Mattel, Inc. and Subsidiaries 33
Consolidated Balance Sheets
- -------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 212,454 $ 694,947
Accounts receivable, less allowances of $41.2 million at December 31, 1998
and $30.7 million at December 31, 1997 983,050 1,091,416
Inventories 584,358 428,844
Prepaid expenses and other current assets 277,948 246,529
- --------------------------------------------------------------------------------------------------------------
Total current assets 2,057,810 2,461,736
- --------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 35,113 29,556
Buildings 271,580 198,396
Machinery and equipment 512,225 453,978
Capitalized leases 23,271 24,625
Leasehold improvements 82,643 68,179
- --------------------------------------------------------------------------------------------------------------
924,832 774,734
Less: accumulated depreciation 375,724 336,946
- --------------------------------------------------------------------------------------------------------------
549,108 437,788
Tools, dies and molds, net 187,349 163,809
- --------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 736,457 601,597
- --------------------------------------------------------------------------------------------------------------
Other Noncurrent Assets
Goodwill, net 1,253,531 534,128
Other assets 214,367 206,330
- --------------------------------------------------------------------------------------------------------------
$4,262,165 $3,803,791
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 134,006 $ 17,468
Current portion of long-term liabilities 33,518 13,659
Accounts payable 293,421 310,117
Accrued liabilities 651,013 629,445
Income taxes payable 205,253 202,735
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 1,317,211 1,173,424
- --------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
6-3/4% senior notes, due 2000 100,000 100,000
6% senior notes, due 2003 150,000 -
6-1/8% senior notes, due 2005 150,000 -
Medium-term notes 540,500 520,500
Mortgage note 43,007 43,573
Other 141,249 144,224
- --------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,124,756 808,297
- --------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, Series C $1.00 par value, $125.00 liquidation preference per
share, 772.8 thousand shares authorized; 771.9 thousand shares issued and
outstanding in 1998 and 1997, respectively 772 772
Common stock $1.00 par value, 1.0 billion shares authorized; 300.4 million shares
issued in 1998 and 1997, respectively 300,381 300,381
Additional paid-in capital 482,662 509,172
Treasury stock at cost; 14.3 million and 8.8 million shares in 1998 and 1997,
respectively (495,347) (285,420)
Retained earnings 1,724,677 1,490,804
Accumulated other comprehensive loss (192,947) (193,639)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,820,198 1,822,070
- --------------------------------------------------------------------------------------------------------------
$4,262,165 $3,803,791
==============================================================================================================
</TABLE>
Commitments and Contingencies (See accompanying notes.)
The accompanying notes are an integral part of these statements.
<PAGE>
Mattel, Inc. and Subsidiaries 34
Consolidated Statements of Operations
- ----------------------------------------
<TABLE>
<CAPTION>
For the Year
--------------------------------------------
(In thousands, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $4,781,892 $4,834,616 $4,535,332
Cost of sales 2,418,899 2,434,616 2,315,574
- -------------------------------------------------------------------------------------------------------------------------
Gross Profit 2,362,993 2,400,000 2,219,758
Advertising and promotion expenses 813,293 779,139 778,919
Other selling and administrative expenses 882,127 796,952 772,335
Amortization of intangibles 41,929 32,179 32,489
Special charges 44,000 - -
Restructuring and integration charges - 275,000 -
Interest expense 110,833 90,130 100,226
Other expense (income), net 5,748 1,518 (967)
- -------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Extraordinary Item 465,063 425,082 536,756
Provision for income taxes 132,799 135,288 164,532
- -------------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 332,264 289,794 372,224
Extraordinary item - loss on early retirement of debt - (4,610) -
- -------------------------------------------------------------------------------------------------------------------------
Net Income 332,264 285,184 372,224
Preferred stock dividend requirements 7,960 10,505 7,391
- -------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Shares $ 324,304 $ 274,679 $ 364,833
=========================================================================================================================
Basic Income Per Common Share
Income before extraordinary item $ 1.11 $ 0.96 $ 1.26
Extraordinary item - loss on early retirement of debt - (0.01) -
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 1.11 $ 0.95 $ 1.26
=========================================================================================================================
Weighted average number of common shares 291,481 290,450 290,393
=========================================================================================================================
Diluted Income Per Common Share
Income before extraordinary item $ 1.10 $ 0.94 $ 1.23
Extraordinary item - loss on early retirement of debt - (0.01) -
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 1.10 $ 0.93 $ 1.23
=========================================================================================================================
Weighted average number of common and common equivalent shares 303,243 295,653 303,057
=========================================================================================================================
Dividends Declared Per Common Share $ 0.31 $ 0.27 $ 0.24
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for 1997 and 1996 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
<PAGE>
Mattel, Inc. and Subsidiairies 35
Consolidated Statements of Cash Flows
- ------------------------------------------
<TABLE>
<CAPTION>
For the Year
--------------------------------------------
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 332,264 $ 285,184 $ 372,224
Adjustments to reconcile net income to net cash flows from operating activities:
Noncash restructuring and integration charges - 90,382 -
Loss on early retirement of debt, net of tax - 4,610 -
Depreciation 169,116 154,994 144,672
Amortization 45,789 34,917 36,671
Increase (decrease) from changes in assets and liabilities:
Accounts receivable 140,248 (201,909) (71,348)
Inventories (47,715) (33,012) (38,304)
Prepaid expenses and other current assets (16,295) (75,810) 15,310
Accounts payable, accrued liabilities and income taxes payable (83,865) 161,640 58,072
Deferred compensation and other retirement plans 2,690 369 9,110
Deferred income taxes (999) 64,015 (2,147)
Other, net 6,268 (3,526) 551
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 547,501 481,854 524,811
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (114,387) (96,006) (108,641)
Purchases of other property, plant and equipment (161,860) (125,567) (122,498)
Payment for acquisitions, net of cash acquired (782,588) (8,625) (8,625)
Investment in other long-term assets (10,783) (7,816) (25,114)
Proceeds from sale of business and other property, plant and equipment 18,667 31,484 6,250
Net proceeds from sales of marketable securities - - 17,315
Other, net (1,484) 566 317
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (1,052,435) (205,964) (240,996)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Short-term borrowings, net 109,110 (6,957) (45,652)
Proceeds from issuance of notes 350,000 310,000 -
Payments of long-term debt (99,310) (234,823) (33,717)
Exercise of stock options and warrants including related tax benefit 114,656 59,677 99,614
Purchase of treasury stock (351,093) (227,932) (269,771)
Sale of treasury stock - 71,248 -
Issuance of preferred stock - - 92,702
Payment of dividends on common and preferred stock (97,970) (84,537) (66,473)
Other, net (1,050) (2,904) (3,127)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (used) for financing activities 24,343 (116,228) (226,424)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (1,902) (14,986) (806)
- ---------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (482,493) 144,676 56,585
Cash at Beginning of Year 694,947 550,271 493,686
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 212,454 $ 694,947 $ 550,271
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for 1997 and 1996 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
<PAGE>
Mattel, Inc. and Subsidiaries 36
Consolidated Statements of Stockholders' Equity
- -----------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Preferred Common Paid-In Treasury Retained Comprehensive Stockholders'
(In thousands) Stock Stock Capital Stock Earnings Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 52 $296,080 $432,150 $ (75,574) $ 994,645 $ (95,673) $1,551,680
Comprehensive income:
Net income 372,224 372,224
Currency translation adjustments 8,728 8,728
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 372,224 8,728 380,952
Purchase of treasury stock (269,771) (269,771)
Restricted stock activity 2,770 (6,627) (3,857)
Exercise of stock options 11 26,414 26,425
Issuance of treasury stock (53,554) 124,315 70,761
Issuance of stock warrant 26,444 26,444
Issuance of preferred stock 773 91,929 92,702
Exercise of stock subscription warrants (9,507) 11,658 2,151
Dividends declared on common stock (65,825) (65,825)
Dividends declared on preferred stock 2 1,650 (7,391) (5,739)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 827 296,091 518,296 (215,999) 1,293,653 (86,945) 1,805,923
Comprehensive income (loss):
Net income 285,184 285,184
Currency translation adjustments (106,694) (106,694)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) 285,184 (106,694) 178,490
Purchase of treasury stock (227,932) (227,932)
Issuance of treasury stock (45,486) 158,511 113,025
Exercise of stock options 636 23,927 24,563
Conversion of 7% notes 893 15,141 16,034
Conversion of preferred stock (55) 2,761 (2,706) -
Dividends declared on common stock (77,528) (77,528)
Dividends declared on preferred stock (10,505) (10,505)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 772 300,381 509,172 (285,420) 1,490,804 (193,639) 1,822,070
Comprehensive income:
Net income 332,264 332,264
Currency translation adjustments 692 692
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 332,264 692 332,956
Purchase of treasury stock (351,393) (351,393)
Issuance of treasury stock (65,210) 141,466 76,256
Exercise of stock options 38,700 38,700
Dividends declared on common stock (90,431) (90,431)
Dividends declared on preferred stock (7,960) (7,960)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $772 $300,381 $482,662 $(495,347) $1,724,677 $(192,947) $1,820,198
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for December 31, 1995 and 1996 have been restated
retroactively for the effects of the March 1997 merger with Tyco, accounted for
as a pooling of interests. See Note 7.
<PAGE>
Mattel, Inc. and Subsidiaries 37
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of Mattel, Inc. and
its subsidiaries ("Mattel" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation, and certain
amounts in the financial statements for prior years have been reclassified to
conform with the current year presentation. Investments in joint ventures and
other companies are accounted for by the equity method or cost basis depending
upon the level of the investment and/or the Company's ability to exercise
influence over operating and financial policies. Financial data for 1997 and
1996 reflect the retroactive effect of the merger, accounted for as a pooling of
interests, with Tyco Toys, Inc. consummated in March 1997 (see Note 7).
Preparation of the consolidated 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.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into US dollars at
fiscal year-end exchange rates. Income, expense and cash flow items are
translated at weighted average exchange rates prevailing during the fiscal year.
The resulting currency translation adjustments are recorded as a component of
other comprehensive income or loss within stockholders' equity.
Cash
Cash includes cash equivalents, which are highly liquid investments with
maturities of three months or less when purchased. Because of the short
maturities of these instruments, the carrying amount is a reasonable estimate of
fair value.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
estimated useful lives of 10 to 40 years for buildings, 18 months to 10 years
for machinery and equipment, and 10 to 20 years, not to exceed the lease term,
for leasehold improvements. Tools, dies and molds are amortized using the
straight-line method over 18 months to 3 years.
Intangibles and Long-Lived Assets
Intangible assets consist of the excess of purchase price over the fair value of
net assets acquired in purchase acquisitions, and the cost of acquired patents
and trademarks. Intangible assets are amortized using the straight-line method
over periods ranging from 18 months to 40 years. Accumulated amortization was
$228.2 million and $186.1 million as of December 31, 1998 and 1997,
respectively.
The Company periodically reviews the carrying value of its fixed and
intangible assets to identify and assess any impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
assets.
Revenue Recognition
Net sales are recognized when products are shipped. Accruals for customer
discounts and rebates, and defective returns are recorded as the related
revenues are recognized.
Advertising Costs
The Company expenses the costs of media advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits. Direct-
response advertising consists primarily of catalogue production and mailing
costs that are generally amortized within three months from the date catalogues
are mailed. Advertising costs associated with customer benefit programs are
accrued as the related revenues are recognized.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the results of
operations for nonqualified stock options granted under the Company's plans as
such options are granted at not less than the quoted market price of the
Company's common stock on the date of grant.
Income Taxes
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities, applying enacted statutory tax rates in effect
for the year in which the differences are expected to reverse.
Income and Dividends Per Common Share
The 1997 and 1996 share and per share data presented in these financial
statements reflect the retroactive effects of the March 1997 Tyco merger.
<PAGE>
Mattel, Inc. and Subsidiaries 38
In the 1997 fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. Accordingly, data for 1997 and
1996 have been restated to present basic and diluted income per common share.
Basic income per common share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during each period. Earnings available to common stockholders represent reported
net income less preferred stock dividend requirements.
Diluted income per common share is computed by dividing diluted earnings
available to common stockholders by the weighted average number of common and
common equivalent shares outstanding during each period. The calculation of
common equivalent shares assumes the exercise of dilutive stock options and
warrants, net of assumed treasury share repurchases at average market prices,
and conversion of dilutive preferred stock and convertible debt, as applicable.
Diluted earnings available to common stockholders represent earnings available
to common stockholders plus preferred stock dividend requirements and interest
savings resulting from the assumed conversions of dilutive securities.
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the years ended December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------
Earnings Shares Earnings Shares Earnings Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item $332,264 $289,794 $372,224
Extraordinary item -
loss on early
retirement of debt - (4,610) -
- --------------------------------------------------------------------------------------------
Net income 332,264 285,184 372,224
Less: preferred
stock dividend
requirements (7,960) (10,505) (7,391)
- --------------------------------------------------------------------------------------------
Earnings available
to common
stockholders $324,304 291,481 $274,679 290,450 $364,833 290,393
Dilutive securities:
Dilutive stock
options 3,369 3,975 4,087
Warrants 662 639 927
7% Notes - - 479 589 728 783
Preferred stock
dividend
requirements 7,960 7,731 - - 7,391 6,867
- --------------------------------------------------------------------------------------------
Diluted earnings
available to
common
stockholders $332,264 303,243 $275,158 295,653 $372,952 303,057
- --------------------------------------------------------------------------------------------
</TABLE>
Premium price stock options totaling 18.7 million were excluded from the
calculation of diluted earnings per share in 1998 because they were anti-
dilutive in each quarter and for the full year. Preferred stock was excluded
from the calculation of diluted earnings per share in 1997 because it was anti-
dilutive. A warrant issued in 1996 to purchase 3.0 million shares of the
Company's common stock was excluded from the calculation of diluted earnings per
share because it was anti-dilutive in 1997 and 1996. The dilutive impact of this
warrant was minimal in the first quarter and full year 1998 calculations and was
anti-dilutive in the remaining quarters of 1998.
Foreign Currency Contracts
The Company enters into foreign currency forward exchange and option contracts
primarily as hedges of inventory purchases, sales and other intercompany
transactions denominated in foreign currencies to limit the effect of exchange
rate fluctuations on its results of operations and cash flows. The Company does
not enter into contracts for speculative purposes. Gains and losses related to
firm commitments, which qualify for hedge accounting, are deferred and are
recognized in the results of operations, balance sheet, and statement of cash
flows as part of the underlying transaction. Contracts that do not qualify for
hedge accounting are marked to market with gains and losses recognized in the
results of operations currently. If a derivative previously designated as a
hedge of a foreign currency commitment is terminated prior to the transaction
date of the related commitment, the resultant gain or loss is recognized at the
time of maturity of the original contract as a component of other expense, net.
Note 2 - Income Taxes
Consolidated pre-tax income consists of the following (in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------------
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
US operations $ 57,965 $ 70,225 $206,668
Foreign operations 407,098 354,857 330,088
- ----------------------------------------------------------------------
$465,063 $425,082 $536,756
- ----------------------------------------------------------------------
</TABLE>
The provision for current and deferred income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
For the Year
--------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 41,274 $ 55,056 $ 89,781
State 5,500 15,745 13,200
Foreign 98,800 80,395 64,165
- ------------------------------------------------------------------------------------
145,574 151,196 167,146
- ------------------------------------------------------------------------------------
Deferred
Federal 1,825 (14,283) 549
State (1,400) 3,640 1,000
Foreign (13,200) (7,962) (4,163)
- ------------------------------------------------------------------------------------
(12,775) (18,605) (2,614)
- ------------------------------------------------------------------------------------
Provision including extraordinary item 132,799 132,591 164,532
Benefit allocated to extraordinary item - 2,697 -
- ------------------------------------------------------------------------------------
Total provision for income taxes $132,799 $135,288 $164,532
- ------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes are provided principally for net operating loss
carryforwards, certain reserves, depreciation, employee compensation-related
expenses and certain other expenses that are
<PAGE>
Mattel, Inc. and Subsidiaries 39
recognized in different years for financial statement and income tax purposes.
The Company's deferred income tax assets (liabilities) were comprised of the
following (in thousands):
<TABLE>
<CAPTION>
As of Year End
---------------------
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Operating loss and tax credit carryovers $ 96,410 $102,713
Sales allowances and inventory reserves 83,573 71,990
Deferred compensation 36,123 27,680
Excess of tax basis over book basis 15,825 15,545
Restructuring and integration charges 15,349 36,446
Postretirement benefits 12,842 12,645
Other 42,000 20,651
- ----------------------------------------------------------------------------------------
Gross deferred income tax assets 302,122 287,670
- ----------------------------------------------------------------------------------------
Excess of book basis over tax basis (14,392) (13,453)
Retirement benefits (15,570) (12,752)
Other (9,159) (10,816)
- ----------------------------------------------------------------------------------------
Gross deferred income tax liabilities (39,121) (37,021)
Deferred income tax asset valuation allowances (63,654) (64,077)
- ----------------------------------------------------------------------------------------
Net deferred income tax assets $199,347 $186,572
- ----------------------------------------------------------------------------------------
</TABLE>
Management considered all available evidence and determined that a
valuation allowance of $63.7 million was required as of December 31, 1998 for
certain tax credit and net operating loss carryforwards that would likely expire
prior to their utilization. However, management feels it is more likely than not
that the Company will generate sufficient taxable income in the appropriate
carryforward periods to realize the benefit of the remaining net deferred tax
assets of $199.3 million.
Differences between the provision for income taxes at the US federal
statutory income tax rate and the provision in the consolidated statements of
operations were as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
--------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at federal statutory rates $162,772 $148,779 $187,864
Increase (decrease) resulting from:
Losses without income tax benefit 1,821 1,468 835
Foreign earnings taxed at different
rates, including withholding taxes (44,301) (42,503) (30,517)
State and local taxes, net of federal benefit 2,665 12,287 9,230
Non-deductible restructuring costs - 20,150 -
Other 9,842 (4,893) (2,880)
- ------------------------------------------------------------------------------------------------
Total provision for income taxes $132,799 $135,288 $164,532
- ------------------------------------------------------------------------------------------------
</TABLE>
Appropriate US and foreign income taxes have been provided for earnings of
foreign subsidiary companies that are expected to be remitted in the near
future. The cumulative amount of undistributed earnings of foreign subsidiaries
that the Company intends to permanently invest and upon which no deferred US
income taxes have been provided is $1.2 billion at December 31, 1998. The
additional US income tax on the unremitted foreign earnings, if repatriated,
would be offset in whole or in part by foreign tax credits.
As of December 31, 1998, the Company has US net operating loss and credit
carryforwards for federal income tax purposes of $40.0 million and $8.2 million,
respectively. These carryforwards were generated primarily by Tyco prior to the
March 1997 merger with Mattel. These net operating loss carryovers expire during
the years 2007 to 2011, while $4.5 million of the tax credits have no expiration
date and $3.7 million of the tax credits will expire during the years 1999 to
2003. Both carryforwards are subject to an annual limitation, but the Company
expects to utilize the losses and credits before the expiration of their
carryforward periods.
In addition, the Company has a US net operating loss carryforward of
approximately $46.1 million, which was generated by Universal Matchbox Ltd. and
subsidiaries ("Matchbox") prior to their acquisition by Tyco. These loss
carryforwards expire during the years 2000 to 2005 and are subject to an annual
limitation, but the Company expects to utilize these losses before the
expiration of the carryforward periods. Accordingly, the goodwill reported in
the consolidated balance sheets attributable to Tyco's 1991 acquisition of
Matchbox has been reduced to reflect the adjustment related to the tax effect of
these losses.
Certain foreign subsidiaries have net operating loss carryforwards totaling
$119.9 million ($87.2 million with no expiration date, $32.6 million expiring
during the years 1999 to 2003, and $0.1 million expiring after 2003).
Generally accepted accounting principles require that tax benefits related
to the exercise by employees of nonqualified stock options be credited to
additional paid-in capital. In 1998, 1997 and 1996, nonqualified stock options
exercised resulted in credits to additional paid-in capital totaling $38.7
million,$17.9 million and $26.3 million, respectively.
The Internal Revenue Service has completed its examination of the Company's
federal income tax returns through December 31, 1991.
Note 3 - Employee Benefits
The Company and certain of its subsidiaries have retirement plans covering
substantially all employees of these companies. Expense related to these plans
totaled $20.0 million, $19.0 million and $16.2 million in 1998, 1997 and 1996,
respectively.
Pension Plans
The Company provides defined benefit pension plans, which satisfy the
requirements of the Employee Retirement Income Security Act of 1974 ("ERISA").
With the exception of the Fisher-Price Pension Plan, activity related to the
Company's pension plans, including those of foreign affiliates, was not
significant during the year.
The components of net pension income for the Fisher-Price Pension Plan,
based upon an October valuation date, for the years ended December 31, 1998,
1997 and 1996 are detailed below (in thousands):
<TABLE>
<CAPTION>
For the Period Ended
--------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,508 $ 2,594 $ 2,671
Interest cost 10,929 10,327 8,866
Expected return on plan assets (18,949) (16,163) (14,784)
Amortization of:
Unrecognized prior service cost 108 134 150
Unrecognized net asset (2,569) (2,569) (2,569)
Plan amendment loss (gain) 1,154 (826) -
- ---------------------------------------------------------------------------------
Net pension income $ (6,819) $ (6,503) $ (5,666)
- ---------------------------------------------------------------------------------
</TABLE>
<PAGE>
Mattel, Inc. and Subsidiaries 40
Reconciliation of the funded status of Fisher-Price's domestic pension plan
to the related prepaid asset included in the consolidated balance sheets are as
follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
-----------------------
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Funded status of the plan $41,335 $60,809
Unrecognized net gain (4,438) (28,271)
Unrecognized prior service cost 1,366 1,474
Unrecognized net transition asset (1,285) (3,854)
- -------------------------------------------------------------------------------------------------
Prepaid pension asset $36,978 $30,158
- -------------------------------------------------------------------------------------------------
</TABLE>
Reconciliation of the assets and liabilities of Fisher-Price's domestic
pension plan are as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
-----------------------
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Plan Assets
Plan assets at fair value, beginning of year $202,887 $157,507
Actual return on plan assets 2,793 51,218
Benefits paid (7,768) (5,838)
- -------------------------------------------------------------------------------------------------
Plan assets at fair value, end of year $197,912 $202,887
=================================================================================================
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year $142,078 $131,379
Service cost 2,508 2,594
Interest cost 10,929 10,327
Plan amendments 1,154 (826)
Actuarial loss 7,676 4,442
Benefits paid (7,768) (5,838)
- -------------------------------------------------------------------------------------------------
Projected benefit obligation, end of year $156,577 $142,078
=================================================================================================
<CAPTION>
For the Period
-------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions:
Weighted average discount rate 7.50% 7.75% 7.75%
Rate of future compensation increases 4.00% 4.00% 4.00%
Long-term rate of return on plan assets 11.00% 11.00% 11.00%
- -------------------------------------------------------------------------------------------------
</TABLE>
Other Retirement Plans
Domestic employees are eligible to participate in the Company's 401(k) savings
plans, which are defined contribution plans satisfying ERISA requirements. The
Company also maintains unfunded supplemental executive retirement plans which
are nonqualified defined benefit plans covering certain key executives. For
1998, 1997 and 1996, the accumulated and vested benefit obligations and related
expense of these plans were not significant.
Deferred Compensation and Excess Benefit Plans
The Company provides a deferred compensation plan which permits certain officers
and key employees to elect to defer portions of their compensation. The deferred
compensation plan, together with certain Company and employee contributions made
to an excess benefit plan, earn various rates of return. The liability for these
plans as of December 31, 1998 and 1997 was $47.8 million and $39.2 million,
respectively. The Company's contribution to these plans and the related
administrative expense were not significant to the results of operations during
any year.
In 1996, the Company purchased group trust-owned life insurance contracts
designed to assist in funding these programs. The cash surrender value of these
policies, valued at $40.7 million and $32.9 million as of December 31, 1998 and
1997, respectively, are held in an irrevocable rabbi trust which is included in
other assets in the consolidated balance sheets.
Postretirement Benefits
Fisher-Price has an unfunded postretirement health insurance plan covering
certain eligible domestic employees hired prior to January 1, 1993. Details of
the expense for the Fisher-Price plan recognized in the consolidated financial
statements for the years ended December 31, 1998, 1997 and 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 218 $ 284 $ 344
Interest cost 2,416 2,465 2,496
- ---------------------------------------------------------------------------------------------------
Net postretirement benefit cost $2,634 $2,749 $2,840
- ---------------------------------------------------------------------------------------------------
</TABLE>
Amounts included in the Company's consolidated balance sheets for this plan
are as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
-----------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current retirees $25,140 $23,846
Fully eligible active employees 4,222 4,640
Other active employees 4,239 4,829
- ---------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 33,601 33,315
Unrecognized net loss (1,716) (1,213)
- ---------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $31,885 $32,102
- ---------------------------------------------------------------------------------------------------
</TABLE>
Reconciliation of the liabilities of Fisher-Price's postretirement health
insurance plan are as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
-----------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Accumulated Postretirement Benefit Obligation
Accumulated postretirement benefit obligation, beginning of year $33,315 $33,182
Service cost 218 284
Interest cost 2,416 2,465
Actuarial loss (gain) 503 (383)
Benefits paid, net of participant contributions (2,851) (2,233)
- ---------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation, end of year $33,601 $33,315
- ---------------------------------------------------------------------------------------------------
</TABLE>
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.50% for 1998 and 7.75% for 1997 and 1996. For all
participants, the health care cost trend rate for expected claim costs was
assumed to be 5.50% in 1998 and remaining constant thereafter. A one percentage
point increase or decrease in the assumed health care cost trend rate for each
future
<PAGE>
Mattel, Inc. and Subsidiaries 41
year would have the following effect on the accumulated postretirement benefit
obligation and the service and interest cost recognized as of and for the year
ended December 31, 1998 (in thousands):
One Percentage Point
--------------------
Increase Decrease
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $3,531 $(3,009)
Service and interest cost 256 (218)
- -------------------------------------------------------------------------------
The Company also maintains a contributory postretirement benefit plan for
domestic employees of Mattel. The ongoing costs and obligations associated with
the Mattel, Inc. plan are not significant to the Company's financial position
and results of operations during any year.
Incentive Awards
The Company's Long-Term Incentive Plan is a three-year plan available to certain
key executives of Mattel, Inc. Interim awards are paid annually based upon the
financial performance of the Company over a three-year period. Amounts charged
to operating expense in 1998, 1997 and 1996 under the current plan were $10.8
million, $13.8 million and $3.9 million, respectively.
The Company also has annual incentive compensation plans for officers and
key employees based on the Company's performance and subject to certain
approvals of the Compensation/Options Committee of the board of directors. For
the years ended December 31, 1998, 1997 and 1996, $11.7 million, $23.2 million
and $12.9 million, respectively, were charged to operating expense for awards
under the Mattel plans and $10.0 million, in 1996, for Tyco.
Prior to the merger, Tyco had a Long-Term Incentive Plan for certain senior
executives, under which Tyco awarded Restricted Stock Units ("RSU"). The
aggregate fair market value of the RSUs was being amortized to compensation
expense by Tyco over the restriction period. At the time of the 1997 merger, the
RSUs were converted into approximately 244 thousand shares of Mattel common
stock which approximated the fair value of the RSUs on the merger consummation
date and the remaining unamortized amount of $5.1 million was charged to
expense.
Note 4 - Seasonal Financing and Long-Term Debt
Seasonal Financing
The Company maintains and periodically amends or replaces an unsecured committed
revolving credit agreement with a commercial bank group that is used as the
primary source of financing the seasonal working capital requirements of its
domestic and certain foreign affiliates. The agreement in effect during 1998
consisted of a committed unsecured facility providing a total of $1.0 billion in
seasonal financing. Within the facility, up to $700.0 million was a standard
revolving credit line available for advances and backup for commercial paper
issuances (a five-year facility that expires in 2003). Interest was charged at
various rates selected by the Company, ranging from market commercial paper
rates to the bank reference rate. The remaining $300.0 million (a five-year
facility that expires in 2003) was available for nonrecourse purchases of
certain trade accounts receivable of the Company by the commercial bank group
providing the credit line. The agreement required the Company to meet financial
covenants for consolidated debt-to-capital and interest coverage and the Company
was in compliance with such covenants during 1998. This agreement will continue
to be in effect during 1999. In addition, the Company avails itself of
uncommitted domestic facilities provided by certain banks to issue short-term
money market loans.
To meet seasonal borrowing requirements of certain foreign affiliates, the
Company negotiates individual financing arrangements, generally with the same
group of banks that provided credit in the prior year. Foreign credit lines
total approximately $370 million, a portion of which is used to support letters
of credit. The Company expects to extend these credit lines throughout year 2000
and believes available amounts will be adequate to meet its seasonal financing
requirements. The Company also enters into agreements with banks of its foreign
affiliates for nonrecourse sales of certain of its foreign subsidiary
receivables.
Interest rates charged on the Company's working capital credit lines are
adjusted on a periodic basis; therefore, the carrying amounts of and other
short-term borrowings is summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
-----------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at end of year
Domestic $ 79,175 $ - $ -
Foreign 54,831 17,468 28,924
Maximum amount outstanding
Domestic $1,076,600 $558,000 $567,000
Foreign 141,000 67,000 113,000
Average borrowing
Domestic $ 400,800 $178,000 $215,000
Foreign 58,000 40,000 72,000
Weighted average interest rate on average borrowing
Domestic (computed daily) 5.6% 5.7% 6.6%
Foreign (computed monthly) 20.3% 11.9% 11.6%
- ------------------------------------------------------------------------------------------
</TABLE>
6-3/4% Senior Notes
In May 1993, the Company issued $100.0 million aggregate principal amount of 6-
3/4% Senior Notes maturing May 15, 2000. Interest is payable semiannually on the
fifteenth day of May and November. At December 31, 1998 and 1997, the bid prices
for the 6-3/4% Senior Notes, as provided by one of the underwriters, were
$1,014.00 and $1,011.85, respectively, based on a par value of $1,000.00.
6% and 6-1/8% Senior Notes
In July 1998, the Company issued $300.0 million aggregate principal amount of
senior notes, $150.0 million of which were 6% Senior Notes maturing July 15,
2003 and $150.0 million of which were 6-1/8% Senior Notes maturing July 15,
2005. Interest is payable semiannually on the fifteenth day of January and July.
At December 31, 1998, the bid prices for the 6% and 6-1/8% Senior Notes, as
provided by one of the underwriters, was $1,004.40 and $998.65, respectively,
based on a par value of $1,000.00. The proceeds of these notes were used to
finance the acquisitions of Pleasant Company and Bluebird.
<PAGE>
Mattel, Inc. and Subsidiaries 42
Medium-Term Notes ("MT Notes")
During the 1994 third quarter, the Company commenced a program for the issuance
of debt and equity securities under various shelf registration statements. In
November 1998, the Company filed its current universal shelf registration
statement allowing the issuance of up to $400.0 million of debt and equity
securities, all of which was available to be issued as of December 31, 1998. The
following is a summary of MT Notes currently outstanding (in millions, except
bid prices):
<TABLE>
<CAPTION>
Bid Price (b)
Year Maturity ---------------------------------------------
Issued Amount Date Rate (a) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 $ 80.5 10/99-12/04 8.00%-8.55% $1,018.75 - $1,112.70 1,031.50 - $1,117.80
1995 130.0 04/02-05/07 7.01%-7.65% 1,043.20 - $1,051.34 1,000.20 - 1,062.90
1997 310.0 11/04-07/12 6.70%-7.49% 1,021.59 - $1,073.45 1,022.58 - 1,064.90
1998 50.0 11/13 6.50%-6.61% 990.52 - $1,000.85 -
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) Interest is payable semiannually at fixed rates on the fifteenth day of May
and November.
(b) Based on a par value of $1,000.00.
Mortgage Note
In 1990, the Company borrowed $45.0 million under a mortgage agreement secured
by its headquarters office facility in El Segundo, California. Interest accrues
at 10.15% and monthly principal and interest payments are due through December
2005. The fair value of the original mortgage note, estimated by discounting
future cash flows at interest rates currently available for debt with the same
credit rating, similar terms and maturity date, was approximately $51 million
and $57 million at December 31, 1998 and 1997, respectively.
7% Convertible Subordinated Notes ("7% Notes")
Upon consummation of the merger, the Company assumed Tyco's $16.0 million
obligation related to the 7% Notes. On September 10, 1997, the holder converted
all of the 7% Notes into 892.7 thousand shares of Mattel common stock.
10-1/8% Senior Subordinated Notes ("10-1/8% Notes")
Upon consummation of the merger, the Company assumed Tyco's $126.5 million
obligation related to the 10-1/8% Notes. On August 15, 1997, the Company
exercised its option and redeemed the 10-1/8% Notes at 103.797% of par together
with accrued interest. In the third quarter of 1997, the Company recognized a
pre-tax extraordinary loss of $7.3 million, and a related income tax benefit of
$2.7 million, as a result of the early retirement.
6-7/8% Senior Notes
The Company's $100.0 million of 6-7/8% Senior Notes issued in August 1992 were
repaid upon maturity on August 1, 1997.
Scheduled Maturities
The aggregate amounts of long-term debt and other obligations maturing in the
next five years are as follows (in thousands):
<TABLE>
<CAPTION>
MT Mortgage
Senior Notes Notes Note Other Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 $ - $30,000 $600 $2,900 $ 33,500
2000 100,000 - 600 600 101,200
2001 - 30,500 700 500 31,700
2002 - 30,000 800 200 31,000
2003 150,000 30,000 800 200 181,000
- ----------------------------------------------------------------------------------------
</TABLE>
Note 5 - Stockholders' Equity
Preference Stock and Preference Share Purchase Rights
The Company is authorized to issue 20.0 million shares of $0.01 par value
preference stock, of which none is currently outstanding. There are 2.0 million
shares of $0.01 par value preference stock designated as Series E Junior
Participating Preference Stock in connection with a distribution of Preference
Share Purchase Rights (the "Rights") to the Company's common stockholders. The
Rights may be exercised by their holders to purchase shares of the Company's
Series E Junior Participating Preference Stock upon the occurrence of a change
of control as defined in the rights agreement. The Rights will expire on
February 17, 2002, unless the agreement is further extended or the Rights are
earlier redeemed or exchanged by the Company.
Preferred Stock
The Company is authorized to issue 3.0 million shares of $1.00 par value
preferred stock, of which 771.9 thousand shares were outstanding as of December
31, 1998 and 1997.
- Series C Mandatorily Convertible Redeemable Preferred Stock
("Series C Preferred Stock")
On June 28, 1996, Tyco received net proceeds of $92.7 million from the sale of
772.8 thousand shares of Series C Preferred Stock. Each share of Series C
Preferred Stock was converted into like Mattel preferred stock as a result of
the March 1997 merger. The par value and liquidation preference of the Series C
Preferred Stock are $1.00 and $125.00 per share, respectively. Dividends are
cumulative and payable in cash on the first day of each calendar quarter at the
rate of $10.3125 per annum. Series C Depositary Shares ("Depositary Shares"),
each representing one twenty-fifth of a share of Series C Preferred Stock,
totaling 19.3 million shares, were sold by the depositary as part of the above
offering at an issue price of $5.00 per share. Each Depositary Share was
converted into a like Mattel depositary share as a result of the March 1997
merger.
Shares of the Series C Preferred Stock (and the related Depositary Shares)
are convertible, at the option of the holders, at any time prior to July 1, 2000
into Mattel common stock at a rate of 0.40064 common shares for each Depositary
Share, subject to adjustment under certain conditions. The Company, at its
option, may redeem the Series C Preferred Stock (and the related Depositary
Shares) at any time on or after July 1, 1999 for a number of Mattel common
shares equal to the call price (which is initially set at $5.103 per Depositary
Share and declines at specified times to
<PAGE>
Mattel, Inc. and Subsidiaries 43
$5.000 per Depositary Share as of June 30, 2000) divided by the current market
price of Mattel common stock (as defined in the Certificate of Designations) or
0.40064 common shares for each Depositary Share, whichever is greater. On July
1, 2000, shares of the Series C Preferred Stock (and the related Depositary
Shares) are mandatorily convertible into 0.54301 Mattel common shares for each
Depositary Share.
The Series C Preferred Stock entitles the holders of Depositary Shares to
vote (at the rate of 0.48876 common shares for each Depositary Share) with the
holders of the Company's common stock as a single class on all matters on which
the holders of the Company's common stock may vote.
- Series B Voting Convertible Exchangeable Preferred Stock
("Series B Preferred Stock")
During 1994, Tyco sold 47.6 thousand shares of Series B Preferred Stock to a
private investment group. Each share of Series B Preferred Stock was converted
into like Mattel preferred stock as a result of the March 1997 merger. Until
April 15, 1996, Tyco paid dividends in the form of additional shares of Series B
Preferred Stock. Dividends issued in shares in lieu of cash during 1996 were
valued at $1.7 million (or 1.6 thousand shares). On December 2, 1997, all
outstanding shares of Series B Preferred Stock were converted by the holders
into 2.8 million shares of Mattel common stock.
Common Stock
In May 1998, the stockholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation that increased the number of
shares of authorized common stock from 600.0 million to 1.0 billion in order to
accommodate issuance of common stock in connection with possible future mergers
and other financing transactions, future stock dividends or splits, future
awards pursuant to the Company's stock option plans, warrant exercises, and
other general corporate purposes.
Stock Compensation Plans
- - Stock Option Plans
In May 1996, the stockholders of the Company approved the Mattel 1996 Stock
Option Plan. Under this plan, incentive stock options, nonqualified stock
options, stock appreciation rights, nonvested stock awards, and shares of common
stock may be granted to officers, key employees, and other persons providing
services to the Company. In addition, nonqualified stock options may be granted
to members of the Company's board of directors who are not employees of the
Company.
Generally, options are exercisable contingent upon the grantees' continued
employment with the Company. Nonqualified stock options are granted at not less
than 100% of the fair market value of the Company's common stock on the date of
grant, generally vest at the rate of 25% per year of service, and usually expire
within ten years from the date of grant. The 1996 Stock Option Plan provides
that up to 1.5% of Mattel's outstanding common stock as of the first day of each
calendar year will be available for awards under the plan. Grants made to
individual participants cannot exceed 1.0 million shares in any single calendar
year. On February 4, 1999, the Company's board of directors approved an
amendment to the 1996 Stock Option Plan authorizing an additional 6.0 million
shares for grant in connection with new employees of businesses acquired by the
Company. The aggregate number of shares of common stock available for grants
under the 1996 Stock Option Plan may not exceed 50.0 million shares. This plan
expires on December 31, 2005. The Company's previous plans, the 1982 and 1990
Stock Option Plans, expired on April 14, 1992 and December 31, 1996,
respectively. All outstanding awards under these plans continue to be
exercisable under the terms of their respective grant agreements.
The fair value of Mattel options granted during 1998, 1997 and 1996 has
been estimated using the Black-Scholes pricing model. The expected life of these
options used in this calculation has been determined using historical exercise
patterns. The following weighted average assumptions were used in determining
fair value:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life (in years) 3.60 3.40 3.17
Risk-free interest rate 4.61% 5.69% 6.05%
Volatility factor 15.80% 17.40% 17.98%
Dividend yield 0.83% 0.86% 0.82%
- -------------------------------------------------------------------------
</TABLE>
The weighted average fair value of Mattel options granted during 1998, 1997
and 1996 were $7.32, $4.86 and $5.12, respectively.
The following is a summary of stock option information and weighted average
exercise prices for Mattel's stock option plans during the year (options in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------
Number Price Number Price Number Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 17,307 $21.73 13,310 $18.05 14,513 $14.27
Options granted 3,680 41.66 7,443 25.79 4,294 25.15
Options exercised (4,284) 17.80 (2,807) 14.89 (5,267) 13.48
Options canceled (628) 29.79 (639) 22.44 (230) 16.67
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31 16,075 $27.02 17,307 $21.73 13,310 $18.05
===================================================================================================
Exercisable at December 31 5,645 $20.48 5,999 $16.29 5,263 $14.41
===================================================================================================
Available for grant at December 31 2,358 1,072 4,074
===================================================================================================
</TABLE>
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
for Mattel stock options outstanding as of December 31, 1998 (options in
thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- -------------------
Exercise Remaining
Price Ranges Number Life Price Number Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.69 to $15.76 1,775 4.87 $14.50 1,775 $14.50
16.16 to 24.00 2,212 6.59 18.96 1,263 17.98
24.70 to 25.50 2,199 7.08 24.72 806 24.73
25.75 to 25.75 5,372 8.10 25.75 1,311 25.75
26.13 to 41.38 1,400 8.23 30.76 490 27.55
42.00 to 42.00 3,117 9.10 42.00 - -
- -------------------------------------------------------------------------------
$ 4.69 to $42.00 16,075 7.60 $27.02 5,645 $20.48
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
Mattel, Inc. and Subsidiaries 44
Prior to the merger, Tyco had various incentive and non-qualified stock
option plans that provided benefits for eligible participants. Effective with
the March 1997 merger, all stock options previously granted and outstanding
under these plans were exchanged for approximately 363 thousand Mattel common
shares (which approximated the fair value of the options as of the merger
consummation date).
In December 1993, restricted stock awards totaling 927.7 thousand shares
were granted to key Mattel executives. During 1996, 244.1 thousand shares were
forfeited and returned to the Company. On January 1, 1997, restrictions on the
remaining 683.6 thousand shares lapsed. Compensation expense of $2.8 million was
charged to income in 1996. In addition, as a result of the forfeiture, $6.6
million of compensation expense that was recognized in previous periods was
reversed in 1996.
- - 1997 Premium Price Stock Option Plan
In November 1997, the Compensation/Options Committee of the board of directors
approved the Mattel, Inc. 1997 Premium Price Stock Option Plan, which was
subsequently approved by the Company's stockholders at the May 1998 meeting.
Under this plan, premium price options may be granted to officers and other key
employees of the Company. Grants made to individual participants cannot exceed
4.5 million shares in any three consecutive calendar years. Participants in this
plan are not eligible to receive grants under the 1996 Stock Option Plan until
the year 2001.
The exercise price of premium price options is calculated at 25% and 33-
1/3% above Mattel's six-month average stock price prior to the date of grant.
Options are forfeited unless the Company's common stock price reaches the
premium exercise price within two years from the date of grant for options with
a 25% premium price and within three years from the date of grant for options
with a 33-1/3% premium price. Options granted under the plan may not be
exercised for three years and expire five years from the date of grant. Each
option includes a Tandem Limited Stock Appreciation Right which gives the holder
the right to receive cash, shares of common stock or any combination of cash and
common stock upon the occurrence of a change of control as defined in the plan.
On February 4, 1999, the Company's board of directors approved an amendment to
the 1997 Premium Price Stock Option Plan authorizing an additional 3.0 million
shares for grant in connection with new employees of businesses acquired by the
Company, bringing the aggregate number of shares of common stock available for
grant under this plan to 24.0 million shares. This plan expires on December 31,
2002.
Options to purchase 1.0 million shares and 17.7 million shares of common
stock were granted during 1998 and 1997, respectively. No options were canceled,
forfeited or exercisable during these periods. Shares available for grant under
this plan were 2.3 million and 3.3 million as of December 31, 1998 and 1997,
respectively.
The fair value of premium price options granted during 1998 and 1997 has
been estimated using the Black-Scholes pricing model. The following assumptions
were used in determining fair value:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Expected life (in years) 5.00 5.00
Risk-free interest rate 5.80% 6.33%
Volatility factor 25.50% 24.10%
Dividend yield 0.83% 0.86%
- -------------------------------------------------------------------------
</TABLE>
The fair value of options granted during 1998 and 1997 was $5.10 and $4.79
for 25% premium price options and $4.92 and $4.86 for 33-1/3% premium price
options, respectively.
The following table summarizes information about the remaining contractual
life (in years) and the exercise prices for premium price options outstanding as
of December 31, 1998 (options in thousands):
<TABLE>
<CAPTION>
Options Outstanding
- ---------------------------------------------------------------------
Number Remaining Life Price
- ---------------------------------------------------------------------
<S> <C> <C>
8,894 3.85 $42.31
8,767 3.85 44.87
500 4.54 50.46
500 4.54 53.83
- ---------------------------------------------------------------------
18,661 $44.04
- ---------------------------------------------------------------------
</TABLE>
- - Compensation Cost
Both Mattel and Tyco adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized in the results of
operations for nonqualified stock options granted under these plans during the
years ended December 31, 1998, 1997 and 1996. Had compensation cost for
nonqualified stock options been determined based on their fair value at the date
of grant consistent with the method of accounting prescribed by SFAS No. 123,
the Company's net income and earnings per share would have been reduced as
follows (amounts in millions except per share data):
<TABLE>
<CAPTION>
For the Year Ended
-------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
Stock option plans $15.7 $ 14.3 $ 7.0
Premium price stock option plan 21.1 - -
- ------------------------------------------------------------------------------
Income per share
Basic $0.13 $ 0.05 $ 0.02
Diluted 0.12 0.05 0.02
- ------------------------------------------------------------------------------
</TABLE>
The pro forma effect on the Company's 1998, 1997 and 1996 net income is not
indicative of the pro forma effect in future years, because it does not take
into consideration the pro forma expense related to grants made prior to 1995.
Stock Subscription Warrants
The Company currently has outstanding warrants exercisable into 751.4 thousand
shares of the Company's common stock at an exercise price of approximately $4.77
per share. These warrants expire on June 30, 2000.
<PAGE>
Mattel, Inc. and Subsidiaries 45
Disney Warrant
In June 1996, the Company entered into a licensing agreement with Disney
Enterprises, Inc. Pursuant to this agreement, the Company issued Disney a
warrant to purchase 3.0 million shares of the Company's common stock at an
exercise price of $27.375 per share. This warrant cannot be exercised prior to
April 2, 1999 and expires no later than April 2, 2004. The warrant's fair value
of $26.4 million was determined using the Black-Scholes pricing model, assuming
an expected life of eight years, a dividend yield of 0.88%, a risk-free interest
rate of 6.17%, and a volatility factor of 27.60%.
The fair value of the warrant is amortized as a component of royalty
expense when the related properties are introduced over the period the related
revenues are recognized. During 1998 and 1997, $3.2 million and $1.1 million,
respectively, was recognized in the results of operations related to this
warrant.
Common Stock Repurchase Plan
Mattel's common stock repurchase plan, initiated in May 1990, provides for the
repurchase of common shares to fund the Company's stock option plans. The number
of shares to be repurchased is authorized on an annual basis by the board of
directors based upon anticipated reissuance needs. During 1998, 1997, and 1996,
Mattel repurchased 9.7 million, 6.5 million, and 10.0 million shares,
respectively.
Dividends and Capital Transactions
A regular quarterly cash dividend has been declared by the Mattel board of
directors on the Company's common stock since the second quarter of 1990. The
board of directors increased the quarterly cash dividend from $0.07 per common
share to $0.08 per common share in the second quarter of 1998. Tyco was
precluded from paying cash dividends on its common stock for the year ended
December 31, 1996 due to limitations set forth in its various debt agreements.
Note 6 - Commitments and Contingencies
Leases
The Company routinely enters into noncancelable lease agreements for commitments
in effect at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
- ---------------------------------------------------------------
<S> <C> <C>
1999 $ 400 $ 37,900
2000 300 29,000
2001 300 19,600
2002 300 11,500
2003 300 7,800
Thereafter 9,600 5,600
- ---------------------------------------------------------------
$11,200(a) $111,400
- ---------------------------------------------------------------
</TABLE>
(a) Includes $8.7 million of imputed interest.
Rental expense under operating leases amounted to $58.4 million,
$61.5 million and $58.1 million for 1998, 1997 and 1996, respectively, net
of sublease income of $0.5 million, $0.3 million and $0.5 million in 1998, 1997
and 1996, respectively.
Commitments
In the normal course of business, the Company enters into contractual
arrangements to obtain and protect the Company's right to create and market
certain products and for future purchases of goods and services to ensure
availability and timely delivery. Such arrangements include royalty payments
pursuant to licensing agreements and commitments for future inventory purchases.
Certain of these commitments routinely contain provisions for guaranteed or
minimum expenditures during the terms of the contracts. Current and future
commitments for guaranteed payments reflect the Company's focus on expanding its
product lines through alliances with businesses in other industries, such as
television and motion picture entertainment companies.
The largest commitment involves the Company's 1991 agreement with The Walt
Disney Company. This licensing agreement, which contains annual minimum royalty
guarantees, permits the Company to use the Disney name and certain characters on
preschool and infant products through September 2002. In related agreements, the
Company participates in attractions and toy stores at three Disney theme parks
under agreements in effect through June 2002. Under these agreements, the
Company makes semi-annual payments to Disney.
In June 1996, the Company entered into a licensing agreement with Disney
Enterprises, Inc. for an expanded strategic alliance, which grants the Company
exclusive worldwide rights (with certain exceptions) to produce toys based on
all children-oriented Disney television and film properties introduced,
commencing summer 1997. The agreement spans three years, with the Company having
the right for up to two additional years to market merchandise from film
properties produced during the second and third years. The initial term of the
agreement may be renewed for an additional three-year period upon mutual
consent. This agreement contains minimum royalty guarantees that are contingent
upon the number and nature of the properties introduced by Disney. Commitments
for 1999 introductions are expected to approximate $19 million payable over a
three-year period. Future commitments could be up to $37.8 million per
introduction year. Pursuant to the agreement, the Company issued Disney a stock
warrant, valued at $26.4 million, to purchase 3.0 million shares of the
Company's common stock.
Licensing and related agreements provide for terms extending from 1999
through 2003 and contain provisions for future minimum payments as shown in the
following table (in thousands):
<TABLE>
<CAPTION>
Minimum Payments
- ---------------------------------------------------------
<S> <C>
1999 $127,000
2000 90,000
2001 88,000
2002 57,000
2003 9,000
- ---------------------------------------------------------
$371,000
- ---------------------------------------------------------
</TABLE>
<PAGE>
Mattel, inc. and Subsidiaries 46
Royalty expense for the years ended December 31, 1998, 1997 and 1996 was
$200.8 million, $194.1 million and $155.3 million, respectively.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million.
Foreign Currency Contracts
To limit the exposure associated with exchange rate movements, the Company
enters into foreign currency forward exchange and option contracts primarily as
hedges of inventory purchases, sales and other intercompany transactions
denominated in foreign currencies. These contracts generally have maturity dates
of up to 18 months. Gains or losses related to firm commitments, which qualify
for hedge accounting, are deferred and are recognized in the results of
operations as part of the underlying transaction. Contracts that do not qualify
for hedge accounting are marked to market with gains and losses recognized in
the results of operations currently. Had the Company not entered into hedges to
limit the effect of exchange rate fluctuations on results of operations and cash
flows, the favorable effect on 1998 pre-tax income would have approximated $5
million.
As of December 31, 1998 and 1997, the Company held the following contracts
to sell foreign currencies (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Forwards $392,972 $394,340 $353,085 $351,169
Options - - 93,547 90,500
- -----------------------------------------------------------------------
$392,972 $394,340 $446,632 $441,669
- -----------------------------------------------------------------------
</TABLE>
Fair value for forwards reflects the amount, based on dealer quotes, the
Company would receive at maturity for contracts involving the same currencies
and maturity dates, if they had been entered into as of year-end 1998 and 1997,
respectively. During 1998, the Company did not enter into any new option
contracts and no option contracts remained outstanding as of December 31, 1998.
As of December 31, 1997, the fair value for options reflects the amount of US
dollars the Company would receive from the current contracts, less the
respective year-end option value. The option value is determined based on dealer
quotes for contracts involving the same currencies and maturity dates.
As of December 31, 1998 and 1997, the Company held $189.1 million and
$362.1 million, respectively, of foreign currency forward exchange contracts to
purchase foreign currencies. The fair value of these contracts was $201.8
million and $346.5 million as of December 31, 1998 and 1997, respectively. Fair
value reflects the amount, based on dealer quotes, the Company would pay at
maturity for contracts involving the same currencies and maturity dates, if they
had been entered into as of year-end 1998 and 1997, respectively.
The following table summarizes the Company's foreign currency contracts by
major currency as of December 31, 1998 and 1997 (in thousands of US dollars):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------
Buy Sell Buy Sell
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US dollars $392,972 $189,122 $446,632 $362,083
German marks 19,119 144,660 19,179 73,977
Italian lira 20,014 68,358 38,277 53,161
Malaysian ringgits - - 53,304 -
Hong Kong dollars 55,829 - 148,084 2,527
French francs 27,435 9,105 - 52,756
British pounds sterling 6,548 66,856 32,548 72,580
Canadian dollars 16,144 18,794 22,608 -
Spanish pesetas 5,625 2,899 - 19,363
Dutch guilders 5,079 8,086 12,778 49,967
Japanese yen - 12,501 - 7,956
Australian dollars 4,988 21,610 6,398 -
Belgian francs - 11,641 - 60,038
Swiss francs 18,341 - 13,677 -
Mexican peso - 22,000 - 50,200
Indonesian rupiah 10,000 - 15,230 -
Other (under $5,000) - 6,462 - 4,107
- -------------------------------------------------------------------------------------------
$582,094 $582,094 $808,715 $808,715
- -------------------------------------------------------------------------------------------
</TABLE>
In order to minimize the risk of counterparty non-performance, the Company
executes its foreign currency forward exchange and option contracts with
financial institutions believed to be credit-worthy, generally those that
provide the Company with its working capital lines of credit.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. The Company seeks to mitigate its exposure to market
risk by monitoring its currency exchange exposure for the year and partially or
fully hedging such exposure. In addition, the Company manages its exposure
through the selection of currencies used for international borrowings and
intercompany invoicing. The Company does not trade in financial instruments for
speculative purposes.
Litigation
- - Beaverton, Oregon
The Company operates a manufacturing facility on a leased property in Beaverton,
Oregon that was acquired as part of the Tyco merger. In March 1998, samples of
groundwater used by the facility for process water and drinking water disclosed
elevated levels of certain chemicals including trichloroethylene ("TCE"). The
Company immediately closed the water supply and self-reported the sample results
to the Oregon Department of Environmental Quality ("DEQ") and Oregon Health
Division. The Company also implemented an employee communication and medical
screening program.
In November 1998, the Company and another potentially responsible party
entered into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the facility, to propose an interim remedial
action measure and to continue the community outreach program to employees,
former employees and
<PAGE>
Mattel, Inc. and Subsidiaries 47
surrounding landowners. It is not presently possible to estimate the cost to the
Company related to the DEQ's investigation and any subsequent orders for work.
- - Toys R Us
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc. The
administrative law judge made findings of fact and conclusions of law that the
toy retailer Toys R Us, Inc. had violated federal antitrust laws and entered
into vertical and horizontal arrangements with various toy manufacturers,
including Mattel, whereby the manufacturers would refuse to do business with
warehouse clubs, or would do business with warehouse clubs only on terms
acceptable to Toys R Us. On October 13, 1998, the Federal Trade Commission
issued an opinion and a final order affirming the findings and conclusions of
the administrative law judge. Toys R Us has now filed a notice of appeal in the
United States Court of Appeals for the Seventh Circuit.
Following the announcement of the administrative law judge's decision,
Mattel was named as a defendant, along with certain other toy manufacturers, in
a number of antitrust actions in various states related to the Toys R Us matter.
The Company has also been named as a defendant in a series of private treble
damage class actions under federal antitrust laws that have been filed in
various federal district courts.
Since May 1998, the Company has participated in settlement negotiations
being conducted with the aid of a mediator. In connection with a proposed
settlement, the Company recognized a $6.0 million pre-tax charge in the fourth
quarter of 1998. After related tax effects, the net $4.3 million charge impacted
1998 earnings by $0.01 per diluted share. The proposed settlement agreement
calls for the Company to make cash and toy contributions prior to November 1999.
Until such time as these matters are concluded in the various courts involved,
Mattel intends to vigorously defend itself in the litigation in which it is
named involving Toys R Us.
- - Greenwald
On October 13, 1995, Michelle Greenwald filed a complaint against the Company in
Superior Court of the State of California, County of Los Angeles. Ms. Greenwald
is a former employee of Mattel who was terminated in July 1995. Her complaint
sought $50 million in general and special damages, plus punitive damages, for
breach of oral, written and implied contract, wrongful termination in violation
of public policy and violation of California Labor Code Section 970. Ms.
Greenwald claimed that her termination resulted from complaints she made to
management concerning general allegations that the Company did not properly
account for sales and certain costs associated with sales and more specific
allegations that the Company failed to properly account for certain royalty
obligations to The Walt Disney Company. During 1996 and 1997, the Company's
motions for summary judgment on all areas of her complaint were granted. In
1998, Ms. Greenwald filed a notice of appeal, which is scheduled to be
considered in March 1999. The Company intends to defend the action vigorously,
including her appeal.
- - Pending Business Combination
During December 1998, a total of six separate purported class action complaints
were filed by several stockholders of Learning Company in the Court of Chancery
of the State of Delaware in and for New Castle County against Learning Company
and its board of directors for alleged breaches of fiduciary duties in
connection with the proposed merger. The six complaints have since been
consolidated. The consolidated complaint seeks the certification as a class of
all Learning Company stockholders, an injunction against the merger, rescission
if the merger is consummated, damages, costs and disbursements, including
attorneys' fees. The consolidated complaint alleges that Learning Company's
board of directors breached their fiduciary duties to Learning Company's
stockholders by, among other things, failing to conduct due diligence sufficient
to have discovered material, adverse information concerning Mattel's anticipated
operational and financial results and agreeing to an exchange ratio that failed
to protect Learning Company stockholders against a decline in the value of
Mattel common stock. The consolidated complaint names Mattel as an additional
defendant, claiming that Mattel aided and abetted the alleged breaches of
fiduciary duty. Mattel will aggressively defend itself against the action and
will continue to pursue the merger.
- - Other Matters
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability, labor and
environmental cleanup, which are being addressed or defended in the ordinary
course of business. Management believes that any liability, which may
potentially result upon resolution of such matters, will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Note 7 - Acquisitions and Nonrecurring Items
Pending Business Combination
In December 1998, Mattel and Learning Company agreed to a merger. The stock-for-
stock transaction, which will be accounted for as a pooling of interests, is
subject to approval by the stockholders of both Mattel and Learning Company and
by certain regulatory agencies. Under the terms of the merger agreement, Mattel
will issue not less than 1.0 nor more than 1.2 shares of Mattel common stock for
each share of Learning Company common stock, depending on the actual exchange
ratio at the time of merger. In addition, each share of Learning Company Series
A Convertible Participating Preferred Stock will be converted into Mattel common
stock equal to the exchange ratio multiplied by 20. The outstanding share of
Learning Company Special Voting Stock will be converted into one share of Mattel
Special Voting Preferred Stock. Each outstanding Exchangeable Non-Voting Share
of Learning Company's Canadian subsidiary, Softkey Software Products Inc., will
remain outstanding, but will thereafter be exchangeable into a number of shares
of Mattel common stock equal to the exchange ratio. Given this range,
<PAGE>
Mattel, Inc. and Subsidiaries 48
the merger would result in the issuance of approximately 102 million to 123
million Mattel common shares for Learning Company common shares. Depending on
the exchange ratio, the number of shares of Mattel common stock to be issued to
Learning Company's common and preferred stockholders, together with the Mattel
common stock to be issued upon the exchange of the exchangeable shares of
Learning Company's Canadian subsidiary, is expected to represent between
approximately 27% and 30% of Mattel's outstanding voting power after the merger.
The merger should be completed in the second quarter of 1999. However, if
the merger is terminated, under certain circumstances, Mattel will receive a
termination fee of up to $35.0 million. Furthermore, if Learning Company
subsequently enters into a business combination within twelve months with a
third party, then they will pay Mattel an additional termination fee of $75.0
million. In connection with the merger agreement, Mattel and Learning Company
entered into a stock option agreement in December 1998 which granted Mattel an
irrevocable option to purchase 15.7 million shares of Learning Company common
stock at a price calculated per the terms of the agreement. This stock option is
intended to increase the likelihood that the merger will be consummated in
accordance with the terms of the merger agreement.
The Company will assume all the debts, liabilities and duties of Learning
Company after the merger, including approximately $201 million aggregate
principal amount of 5-1/2% Senior Convertible Notes due 2000.
Acquisitions
During 1998, the Company acquired Pleasant Company and Bluebird, which were
accounted for using the purchase method of accounting. The results of operations
of the acquired companies have been included in the Company's consolidated
financial statements from their respective dates of acquisition.
In July 1998, the Company completed its acquisition of Pleasant Company, a
Wisconsin-based direct marketer of books, dolls, clothing, accessories, and
activity products included under the American Girl(R) brand name. The purchase
price, including investment advisor and other costs directly related to the
acquisition, was approximately $715 million. The excess of cost over the
estimated fair market value of tangible net assets acquired was approximately
$690 million. Total excess has been allocated to customer lists, a covenant not-
to-compete, and magazine subscription lists which are being amortized on a
straight-line basis over a 3 to 15 year period, with the remaining excess being
amortized on a straight-line basis over 40 years.
In June 1998, the Company acquired Bluebird, a company organized in the
United Kingdom, from which Mattel licensed the product designs for its Polly
Pocket(R) and Disney Tiny Collections brands, as well as the Polly Pocket(R)
trademarks. The aggregate purchase price, including investment advisor and other
directly related expenses, was approximately $80 million. Intercompany accounts
and transactions between Bluebird and the Company have been eliminated. The
excess of cost over the estimated fair market value of tangible net assets
acquired was approximately $60 million, which is being amortized on a straight-
line basis over 40 years.
Business Combination and Related Integration and
Restructuring Charge
In March 1997, the Company completed its merger with Tyco, accounted for as a
pooling of interests. Under the merger agreement, each outstanding share of Tyco
common stock was converted into the right to receive 0.48876 Mattel common
shares and resulted in the issuance of approximately 17 million shares. Tyco
restricted stock units and stock options outstanding as of the merger date were
exchanged for approximately 0.6 million Mattel common shares. In addition, each
share of Tyco Series B and Series C Preferred Stock was converted into like
Mattel preferred stock. Financial information for periods prior to the merger
reflect the retroactive restatement of the companies' combined financial
position and operating results.
In connection with the Tyco merger, the Company commenced an integration
and restructuring plan and recorded a $275.0 million pre-tax charge against
operations in March 1997. After related tax effects, the net $209.7 million
charge impacted 1997 earnings by $0.71 per diluted share. The plan consisted of
consolidating certain manufacturing and distribution operations, eliminating
duplicative marketing and administrative offices, terminating various
distributor and licensing arrangements and abandoning certain product lines. As
of December 31, 1998, the total integration and restructuring activity provided
for by this charge was substantially complete and amounts previously accrued had
been paid. The type and amount of charges incurred to date approximated the
amounts included in the provision.
Special Charges
In the 1998 third quarter, the Company recognized a $38.0 million pre-tax
charge related to a voluntary recall of certain Power Wheels(R) ride-on
vehicles. After related tax effects, the net $27.2 million charge impacted
1998 earnings by $0.09 per diluted share. The recall did not result from
any serious injury, and involves the replacement of electronic components
that may overheat, particularly when consumers make alterations to the
product.
In the 1998 fourth quarter, the Company recognized a $6.0 million
pre-tax charge related to the proposed settlement of the Toys R Us-related
antitrust litigation. After related tax effects, the net $4.3 million
charge impacted 1998 earnings by $0.01 per diluted share. The proposed
settlement agreement calls for cash and toy contributions by the Company
prior to November 1999.
<PAGE>
Mattel, Inc. and Subsidiaries 49
During 1996, the Company received comments from the Securities and Exchange
Commission regarding its accounting for certain royalties and participation fees
in prior periods. The Company commenced an investigation with the assistance of
outside legal counsel and an independent accounting firm. A report issued as a
result of the investigation concluded that no evidence was found that the
Company accounted for sales and costs associated with sales in a manner that is
inconsistent with generally accepted accounting principles. The report also
concluded that the Company's accounting treatment for royalties, which was
adopted with the concurrence of Mattel's independent accountants, represented a
reasonable application of generally accepted accounting principles given the
facts and circumstances as they existed at the time the accounting decisions
were made. While the Company believes that its accounting treatment was correct,
Mattel recognized a catch-up adjustment in the amount of $21.8 million before
taxes in the fourth quarter of 1996.
Note 8 - Segment Information
In the 1998 fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. This statement supercedes Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of a Business Enterprise,
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. This statement requires disclosure
of certain information by reportable segment, geographic area and major
customer.
Mattel designs, manufactures and markets a broad variety of children's
products on a worldwide basis. These product lines are grouped into four major
categories which represent the Company's operating segments, as follows:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
software, Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R), and Polly
Pocket(R)
Infant and Preschool - including Fisher-Price(R), Disney preschool and plush,
Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna Doodle(R), and View-
Master(R)
Entertainment - including Disney, Nickelodeon(R), games, and puzzles
Wheels - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and
Tyco(R) Radio Control
These operating segments all have similar economic characteristics, market
children's products, and share the same production process. Based on these
similarities, the Company's products can be aggregated into one reportable
segment for purposes of this disclosure.
The table below presents information by geographic area (in thousands).
Revenues are attributed to countries based on location of customer. Long-lived
assets principally include net property, plant and equipment, and goodwill.
<TABLE>
<CAPTION>
Long-Lived
Net Sales Assets
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
1998
United States $3,298,838 $1,301,237
Europe and Canada 1,096,287 222,893
Asia and Latin America 386,767 411,118
- ----------------------------------------------------------------------------------------------------
4,781,892 1,935,248
Corporate and other - 245,985
- ----------------------------------------------------------------------------------------------------
Consolidated total $4,781,892 $2,181,233
====================================================================================================
1997
United States $3,307,576 $ 577,727
Europe and Canada 1,143,378 166,423
Asia and Latin America 383,662 346,549
- ----------------------------------------------------------------------------------------------------
4,834,616 1,090,699
Corporate and other - 229,625
- ----------------------------------------------------------------------------------------------------
Consolidated total $4,834,616 $1,320,324
====================================================================================================
1996
United States $2,829,123 $ 582,038
Europe and Canada 1,275,706 231,805
Asia and Latin America 430,503 364,079
- ----------------------------------------------------------------------------------------------------
4,535,332 1,177,922
Corporate and other - 191,917
- ----------------------------------------------------------------------------------------------------
Consolidated total $4,535,332 $1,369,839
====================================================================================================
</TABLE>
Credit is granted to customers on an unsecured basis, and generally
provides for extended payment terms which result in a substantial portion of
trade receivables being collected during the latter half of the year. Customers
accounting for more than 10% of the Company's consolidated net sales and related
accounts receivable are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Worldwide sales for the year ended
Toys R Us $729.3 $859.5 $1,039.6
Wal-Mart 790.8 739.1 555.9
Accounts receivable as of December 31
Toys R Us $148.9 $260.7 $ 185.0
Wal-Mart 291.4 178.6 90.4
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Mattel. Inc. and Subsidiaries 50
Note 9 - Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Net sales $ 705,164 $ 861,526 $1,672,120 $1,543,082
Gross profit 323,918 404,748 852,237 782,090
Advertising and promotion expenses 98,081 109,875 253,493 351,844
Other selling and administrative expenses 183,791 190,689 218,543 289,104
Amortization of intangibles 7,713 7,741 12,714 13,761
Special charges (a) - - 38,000 6,000
Income before income taxes 17,756 84,617 279,486 83,204
Net income 12,669 60,384 199,665 59,546
Preferred stock dividend requirements (1,990) (1,990) (1,990) (1,990)
Net income applicable to common shares 10,679 58,394 197,675 57,556
Basic income per common share:
Net income $ 0.04 $ 0.20 $ 0.68 $ 0.20
Weighted average number of common shares 293,048 293,433 291,870 287,630
Diluted income per common share:
Net income $ 0.04 $ 0.20 $ 0.66 $ 0.20
Weighted average number of common and common equivalent shares 298,164 297,720 303,551 290,399
Dividends declared per common share $ 0.07 $ 0.08 $ 0.08 $ 0.08
Common stock market price:
High $ 45.63 $ 43.63 $ 42.31 $ 39.63
Low 35.63 36.00 28.00 21.69
YEAR ENDED DECEMBER 31, 1997 (b)
Net sales $ 693,520 $ 972,656 $1,555,347 $1,613,093
Gross profit 322,811 458,837 800,277 818,075
Advertising and promotion expenses 102,626 131,713 244,231 300,569
Other selling and administrative expenses 185,286 192,707 198,767 220,192
Amortization of intangibles 8,122 8,092 8,033 7,932
Restructuring and integration charges (c) 275,000 - - -
Income (loss) before income taxes and extraordinary item (267,619) 107,944 317,755 267,002
Extraordinary item - loss on early retirement of debt - - (4,610) -
Net income (loss) (204,624) 75,634 219,045 195,129
Preferred stock dividend requirements (2,840) (2,837) (2,838) (1,990)
Net income (loss) applicable to common shares (207,464) 72,797 216,207 193,139
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.72) $ 0.25 $ 0.76 $ 0.66
Extraordinary item - loss on early retirement of debt - - (0.02) -
Net income (loss) $ (0.72) $ 0.25 $ 0.74 $ 0.66
Weighted average number of common shares 288,382 291,737 290,650 290,962
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ (0.72) $ 0.25 $ 0.73 $ 0.64
Extraordinary item - loss on early retirement of debt - - (0.02) -
Net income (loss) $ (0.72) $ 0.25 $ 0.71 $ 0.64
Weighted average number of common and common equivalent shares 288,382 296,609 306,870 306,053
Dividends declared per common share $ 0.06 $ 0.07 $ 0.07 $ 0.07
Common stock market price:
High $ 29.25 $ 35.25 $ 35.75 $ 41.38
Low 24.00 24.00 32.38 33.38
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents a nonrecurring charge in the third quarter related to a
voluntary recall of certain Power Wheels(R) ride-on vehicles, and a one-
time charge in the fourth quarter in connection with the proposed Toys R
Us-related antitrust litigation settlement.
(b) Financial information for the first quarter of 1997 has been restated
retroactively for the effects of the March 1997 merger with Tyco, accounted
for as a pooling of interests.
(c) Represents a nonrecurring charge for transaction, integration and
restructuring costs related to the merger with Tyco.
<PAGE>
Mattel, Inc. and Subsidiaries 51
Note 10 - Supplemental Financial Information
<TABLE>
<CAPTION>
As of Year End
-------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Inventories include the following:
Raw materials and work in process $ 42,851 $ 48,620
Finished goods 541,507 380,224
- ---------------------------------------------------------------------------
$584,358 $428,844
===========================================================================
Prepaid expenses and other current assets
include the following:
Deferred income taxes $178,060 $170,626
Other 99,888 75,903
- ---------------------------------------------------------------------------
$277,948 $246,529
===========================================================================
Short-term borrowings include the following:
Commercial paper $ 78,000 $ -
Notes payable 56,006 17,468
- ---------------------------------------------------------------------------
$134,006 $ 17,468
===========================================================================
Accrued liabilities include the following:
Advertising and promotion $147,551 $144,020
Mattel restructuring and Tyco integration 33,497 108,581
Royalties 99,674 79,304
Other 370,291 297,540
- ---------------------------------------------------------------------------
$651,013 $629,445
===========================================================================
<CAPTION>
For the Year
-------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Selling and administrative expenses
include the following:
Research and development $178,001 $156,350 $147,174
- --------------------------------------------------------------------------------
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Income taxes $ 93,936 $105,812 $107,944
Interest 103,627 94,320 99,019
Noncash investing and financing activities:
Issuance of stock warrant - - 26,444
Conversion of 7% Notes - 16,034 -
- --------------------------------------------------------------------------------
</TABLE>
Note 11 - New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The Company is required to adopt this
statement for its fiscal year beginning January 1, 2000. Management believes the
adoption of this statement will not have a material impact on the Company's
consolidated financial position or results of operations.
<PAGE>
Mattel, Inc. and Subsidiaries 52
Management Report on Responsibility
- --------------------------------------------------------------------------------
for Financial Reporting
Management is responsible for the preparation of the Company's consolidated
financial statements and the related financial and non-financial information
appearing in this annual report. The financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, present fairly the Company's financial position, results of
operations and cash flows. The financial statements necessarily contain some
amounts that are based on the best estimates and judgments of management.
The Company maintains accounting and internal control systems which
management believes are adequate to provide reasonable assurance, in relation to
reasonable cost, as to the integrity and reliability of the financial statements
and as to protection of assets from unauthorized use or disposition. The
selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures, and a
program of internal audit are important elements of these control systems.
The Company's internal auditors are directed to examine the adequacy and
effectiveness of the Company's system of internal accounting, administrative and
operational controls. They conduct formal and systematic reviews to determine
that operations are adequately controlled and to assure that assets are
effectively safeguarded.
The board of directors has appointed an audit committee, composed entirely
of nonemployee directors. The committee meets regularly with financial
management, internal auditors and the independent accountants to review
accounting control, auditing and financial reporting matters.
PricewaterhouseCoopers LLP, independent accountants, have been retained to
audit the Company's consolidated financial statements. They conduct a review of
internal accounting controls to the extent required by generally accepted
auditing standards and perform such tests and related procedures as they deem
necessary to arrive at an opinion on the fairness of the financial statements.
/s/ Harry J. Pearce
Harry J. Pearce
Chief Financial Officer
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Mattel, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Mattel, Inc. and its subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 did not audit the financial statements of Tyco Toys, Inc. and its
subsidiaries, which statements reflect net sales of $720,954,000 for the year
ended December 31, 1996. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Tyco Toys, Inc. and its
subsidiaries, is based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 1, 1999
<PAGE>
Mattel, Inc. and Subsidiaries 53
Directors and Officers
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Jill E. Barad (1) (5)
Chairman and Chief Executive Officer, Mattel, Inc.
Dr. Harold Brown (4) (5)
Senior Managing Director, E.M. Warburg, Pincus & Co., LLC
Tully M. Friedman (1) (6)
Founding Partner and Chairman, Friedman & Fleischer, LLC
Joseph C. Gandolfo (5)
President, Worldwide Manufacturing Operations, Mattel, Inc.
Ronald M. Loeb (3) (6)
Retired Partner, Irell & Manella
Ned Mansour (6)
President, Corporate Operations and General Counsel, Mattel, Inc.
Andrea L. Rich (3) (6)
President and Chief Executive Officer, Los Angeles County Museum of Art
William D. Rollnick (1) (2) (3)
Retired Chairman, Genstar Rental Electronics, Inc.
Pleasant T. Rowland
Vice Chairman, Mattel, Inc. and President, Pleasant Company
Christopher A. Sinclair (2) (4)
President and Chief Executive Officer, Quality Food Centers
John L. Vogelstein (1) (2) (3) (6)
Vice Chairman of the Board, President, and Director, E.M. Warburg, Pincus &
Co., LLC
(1) Member, Executive/Finance Committee
John L. Vogelstein, Chairman
(2) Member, Compensation/Options Committee
John L. Vogelstein, Chairman
(3) Member, Audit Committee
William D. Rollnick, Chairman
(4) Member, Pension Committee
Christopher A. Sinclair, Chairman
(5) Member, Foundation Committee
Dr. Harold Brown, Chairman
(6) Member, Nominations/Corporate Governance Committee
Ronald M. Loeb, Chairman
CORPORATE OFFICERS
Jill E. Barad
Chairman and Chief Executive Officer
Pleasant T. Rowland
Vice Chairman, Mattel and President, Pleasant Company
Joseph C. Gandolfo
President, Worldwide Manufacturing Operations
Ned Mansour
President, Corporate Operations and General Counsel
Francesca Luzuriaga
Executive Vice President, Worldwide Business Planning and Resources
Harry J. Pearce
Chief Financial Officer
Glenn Bozarth
Senior Vice President, Corporate Communications
Fermin Cuza
Senior Vice President, International Trade and Worldwide Government Affairs
Kevin M. Farr
Senior Vice President and Corporate Controller
John T. Phippen
Senior Vice President and Chief Information Officer
William Stavro
Senior Vice President and Treasurer
BUSINESS UNIT EXECUTIVES
Astrid Autolitano
President, Mattel International
Matthew C. Bousquette
President, Boys/Entertainment
Adrienne Fontanella
President, Girls/Barbie
Neil B. Friedman
President, Fisher-Price brands
David Haddad
President, Mattel Media
<PAGE>
Mattel, Inc. and Subsidiaries 54
Corporate Information
- --------------------------------------------------------------------------------
Transfer Agent and Registrar
Mattel, Inc. Common Stock
BankBoston, N.A.
c/o EquiServe Limited Partnership
Depositary
Mattel, Inc. Depositary Shares, each representing one twenty-fifth
of a share of Series C Mandatorily Convertible Redeemable Preferred Stock
BankBoston, N.A.
c/o EquiServe Limited Partnership
Note Trustees
Mattel, Inc. 6-3/4% Senior Notes due May 15, 2000
Mattel, Inc. 6% Senior Notes due July 15, 2003
Mattel, Inc. 6-1/8% Senior Notes due July 15, 2005
Mattel, Inc. Medium-Term Notes
Chase Manhattan Bank and Trust Company National Association
101 California Street, Suite 2725
San Francisco, California 94111
Stock Exchange Listings
Mattel, Inc. Common Stock and Mattel, Inc. Preference Share
Purchase Rights
New York Stock Exchange and Pacific Exchange, Inc.
Mattel, Inc. Depositary Shares
New York Stock Exchange
Stockholder Administration
Inquiries relating to stockholder accounting records, stock
transfer, dividends (including dividend reinvestment) and direct
stock purchase should be directed to:
BankBoston, N.A.
c/o EquiServe Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
Telephone numbers:
888-909-9922 (DRIP information only)
800-730-4001 (stockholder information)
Website: www.equiserve.com
Common Stockholders
As of March 1, 1999, there were approximately 48,000 holders of record of
Mattel, Inc. common stock.
Annual Meeting
The Annual Meeting of Stockholders will be held June 3, 1999 at
10:00 a.m. at the Manhattan Beach Marriott, Manhattan Beach, California.
Form 10-K
Mattel's Annual Report to the Securities and Exchange Commission on Form 10-K
for the year ended December 31, 1998 is available upon request by writing to the
Secretary of the Company, 333 Continental Boulevard, El Segundo, California
90245-5012.
Trademark Legends
Barbie, Fisher-Price, Hot Wheels, Matchbox, Tyco, American Girl, Mattel
Media, View-Master, Generation Girl, My Design, Polly Pocket, Power Wheels,
See 'N Say, X3 Microscope and Me2Cam are trademarks of Mattel, Inc.
Disney characters: (C) Disney; Winnie the Pooh: (C) Disney. Based on the "Winnie
the Pooh" works. Copyright A.A. Milne and E.H. Shepard; Mulan: (C) Disney;
Disney's Tarzan: (C) 1999 Edgar Rice Burroughs, Inc. and Disney Enterprises,
Inc. Tarzan owned by Edgar Rice Burroughs, Inc. and used by permission; A Bug's
Life and Toy Story 2: (C) Disney/Pixar; Sesame Street Muppets: (C) 1999 Jim
Henson Productions, Inc. Sesame Street and the Sesame Street sign are registered
trademarks of Children's Television Workshop; Magna Doodle is a trademark
licensed from Pilot Corporation of America; Nickelodeon, Nick Jr., Rugrats,
Blue's Clues and all related titles, logos and characters are trademarks of
Viacom International Inc. (C) 1999 Viacom International Inc.; Ferrari models
licensed by Ferrari; Nascar is a registered trademark of The National
Association for Stock Car Auto Racing, Inc.; CAT and Caterpillar are registered
trademarks of Caterpillar Inc. (C) 1999 Caterpillar Inc.; Cabbage Patch Kids:
(C) 1999 Original Appalachian Artworks, Inc. Cabbage Patch Kids, logo and
related trademarks are trademarks of and licensed from Original Appalachian
Artworks, Inc.; Frank Sinatra: (C) 1999 Sheffield Enterprises, Inc. and Bristol
Productions Ltd. Partnership Inc.; Elizabeth Taylor: (C) 1999 Interplanet
Products, Limited; Lucille Ball: Images of Lucille Ball are used with permission
of Desilu, too, LLC; Elvis Presley is a registered trademark of Elvis
Presley Enterprises, Inc.; Audrey Hepburn: Licensed by the Audrey Hepburn
Estate; Microsoft and Windows are registered trademarks of Microsoft Inc.; Intel
is a registered trademark of Intel Corporation; Playstation is a trademark of
Sony Computer Entertainment Inc.; Nintendo and Game Boy are trademarks of
Nintendo of America, Inc.; UCLA is a trademark of The Regents of the University
of California; The Learning Company is a trademark of The Learning Company,
Inc.; National Geographic is a trademark of National Geographic Society;
American Greetings is a trademark of American Greetings Corporation; Mustang
trademark used under license from Ford Motor Company. All other product names
and associated designs mentioned or shown in this annual report are trademarks
and copyrighted properties of their respective owners.
<PAGE>
EXHIBIT 21.0
(Page 1 of 2)
SUBSIDIARIES OF MATTEL, INC.
<TABLE>
<CAPTION>
Percentage of
Voting Securities
Jurisdiction Owned Directly
in Which or Indirectly
Subsidiaries(1) Organized By Parent(2)
- --------------- ------------ -----------------
<S> <C> <C>
American Girl Music Incorporated................. Wisconsin 100%
American Girl Place Incorporated................. Wisconsin 100%
American Girls Productions Incorporated.......... Wisconsin 100%
ARCOTOYS, Inc. .................................. Delaware 100%
Arco Toys, Limited.............................. Hong Kong 100%
Far West Insurance Company, Limited.............. Bermuda 100%
Fisher-Price, Inc. .............................. Delaware 100%
Mabamex, S.A. de C.V. ........................... Mexico 100%
Mattel Argentina S.A. ........................... Argentina 100%
Mattel Bangkok Limited........................... Thailand 80%
Mattel Belgium N.V. ............................. Belgium 100%
Mattel do Brasil Ltda. .......................... Brazil 100%
Mattel Chile S.A. ............................... Chile 100%
Mattel Colombia S.A. ............................ Colombia 100%
Mattel Distribution, Inc. ....................... Delaware 100%
Mattel East Asia Limited......................... Hong Kong 100%
Mattel Espana, S.A. ............................. Spain 100%
Mattel Factoring, Inc. .......................... Delaware 100%
Mattel (HK) Limited.............................. Hong Kong 100%
Mattel Holding, Inc. ............................ Delaware 100%
Mattel U.K. Limited............................. U.K. 100%
Mattel Tyco (UK) Ltd. ......................... U.K. 100%
Mattel Acquisitions plc........................ U.K. 100%
Bluebird Toys plc............................. U.K. 100%
Bluebird Toys Far East Ltd. ................. Hong Kong 100%
Bluebird Toys (UK) Limited................... U.K. 100%
Matchbox Collectibles (Europe) Ltd. ........... U.K. 100%
Fisher-Price Toys Ltd. ........................ U.K. 100%
Mattel Group PLC............................... U.K. 100%
J.W. Spear & Sons PLC......................... U.K. 100%
Mattel Holdings Limited.......................... Canada 100%
Mattel Canada Inc. ............................. Canada 100%
Mattel I., Inc. ................................. Delaware 100%
Mattel S.r.l. .................................. Italy 100%
Mattel A.E.B.E. ............................... Greece 100%
Mattel A.G. ................................... Switzerland 100%
Mattel Manufacturing Europe, S.r.l. ........... Italy 100%
</TABLE>
- --------
(1) All of the subsidiaries listed above are included in the Consolidated
Financial Statements. Twenty five are not named because, when considered
in the aggregate, they do not constitute a significant subsidiary.
Furthermore, approximately thirty two subsidiaries are inactive and
financial statements are not prepared for such companies.
(2) Parent refers to Mattel, Inc. (a Delaware corporation) and excludes
Directors' qualifying shares.
<PAGE>
EXHIBIT 21.0
(Page 2 of 2)
<TABLE>
<CAPTION>
Percentage of
Voting Securities
Jurisdiction Owned Directly
in Which or Indirectly
Subsidiaries(1) Organized By Parent(2)
- --------------- --------------- -----------------
<S> <C> <C>
Mattel International Holdings B.V. ......... The Netherlands 100%
Mattel Europe Holdings B.V. ............... The Netherlands 100%
Mattel G.m.b.H. .......................... Germany 100%
Mattel Hungary Ipari Es Kereskedelmi
KFT..................................... Hungary 100%
Mattel Spol. S.R.O. ..................... Czech Republic 100%
Mattel Europa B.V. ....................... The Netherlands 100%
Nanhai City Mattel Diecast Ltd. ......... China 100%
Mattel B.V. ............................. The Netherlands 100%
P.T. Mattel Indonesia.................... Indonesia 100%
Mattel France S.A. ....................... France 100%
Corolle S.A. ............................ France 100%
Mattel Portugal Limitada................ Portugal 100%
Mattel Gesellschaft m.b.H. ............... Austria 100%
Mattel Northern Europe.................... Denmark 100%
Mattel Japan Limited........................ Japan 100%
Mattel (K.L.) Sdn.Bhd. ..................... Malaysia 100%
Mattel (Malaysia) Sdn.Bhd. ................. Malaysia 100%
Mattel Manufacturas de Monterrey, S.A. de
C.V. ...................................... Mexico 100%
Mattel Media, Inc. ......................... Delaware 100%
Mattel de Mexico, S.A. de C.V. ............. Mexico 100%
Mattel Servicios, S.A. de C.V. ............ Mexico 100%
Mattel (NZ) Limited......................... New Zealand 100%
Mattel Operations, Inc. .................... Delaware 100%
Mattel Overseas, Inc. ...................... California 100%
Mattel Vendor Operations Asia Limited...... Hong Kong 100%
Mattel Polska Sp. Z.O.O. ................... Poland 100%
Mattel Pty. Limited......................... Australia 100%
Mattel Realty Corporation................... Delaware 100%
Mattel Sales Corp. ......................... California 100%
Mattel Southeast Asia Pte. Ltd. ............ Singapore 100%
Mattel Specialty, Inc. ..................... Delaware 100%
Mattel Tools Sdn.Bhd. ...................... Malaysia 100%
Mattel Taiwan Corporation................... Taiwan 100%
Mattel de Venezuela, C.A. .................. Venezuela 100%
Montoi S.A. de C.V. ........................ Mexico 100%
Pleasant Company............................ Wisconsin 100%
Pleasant Company Publications............... Wisconsin 100%
Pleasant Company Productions................ Wisconsin 100%
Precision Moulds Limited.................... Hong Kong 100%
PrintPaks, Inc. ............................ Oregon 100%
Tyco Preschool Toys, Inc. .................. Delaware 100%
Tyco Hong Kong Ltd. ....................... Hong Kong 100%
Tyco Toys (Europe) N.V. .................... Belgium 100%
Universal International Holdings Ltd. ...... Hong Kong 100%
</TABLE>
- --------
(1) All of the subsidiaries listed above are included in the Consolidated
Financial Statements. Twenty five are not named because, when considered
in the aggregate, they do not constitute a significant subsidiary.
Furthermore, approximately thirty two subsidiaries are inactive and
financial statements are not prepared for such companies.
(2) Parent refers to Mattel, Inc. (a Delaware corporation) and excludes
Directors' qualifying shares.
<PAGE>
EXHIBIT 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in each of the eleven
Registration Statements on Form S-8 (No. 33-14717, No. 33-51454, No. 33-34920,
No. 33-57082, No. 33-62185, No. 333-01061, No. 333-03385, No. 333-47459, No.
333-47461, No. 333-67493 and No. 333-75145), in the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 333-68017), and in the
Prospectus constituting part of the Registration Statement on Form S-4 (No.
333-71587) of Mattel, Inc. and its subsidiaries of our report dated February
1, 1999, which appears in the Annual Report to Stockholders which is
incorporated by reference in this Annual Report on Form 10-K. We also consent
to the incorporation by reference of our report on the Financial Statement
Schedule, which appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 31, 1999
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in each of the eleven
Registration Statements on Form S-8 (No. 33-14717, No. 33-51454, No. 33-34920,
No. 33-57082, No. 33-62185, No. 333-01061, No. 333-03385, No. 333-47459, No.
333-47461, No. 333-67493 and No. 333-75145), in the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 333-68017), and in the
Prospectus constituting part of the Registration Statement on Form S-4 (No.
333-71587) of Mattel, Inc. of our report dated February 4, 1997 (except for
note 15, as to which the date is March 27, 1997) relating to the consolidated
financial statements of Tyco Toys, Inc. and subsidiaries, not presented
separately herein, appearing in Mattel, Inc.'s Annual Report on Form 10-K.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MATTEL
INC.'S BALANCE SHEETS AND INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 212,454
<SECURITIES> 0
<RECEIVABLES> 1,024,254
<ALLOWANCES> 41,204
<INVENTORY> 584,358
<CURRENT-ASSETS> 2,057,810
<PP&E> 1,112,181
<DEPRECIATION> 375,724
<TOTAL-ASSETS> 4,262,165
<CURRENT-LIABILITIES> 1,317,211
<BONDS> 983,507
0
772
<COMMON> 300,381
<OTHER-SE> 1,519,045
<TOTAL-LIABILITY-AND-EQUITY> 4,262,165
<SALES> 4,781,892
<TOTAL-REVENUES> 4,781,892
<CGS> 2,418,899
<TOTAL-COSTS> 2,418,899
<OTHER-EXPENSES> 1,787,097
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,833
<INCOME-PRETAX> 465,063
<INCOME-TAX> 132,799
<INCOME-CONTINUING> 332,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,264
<EPS-PRIMARY> 1.11 <F1>
<EPS-DILUTED> 1.10 <F1>
<FN>
Notes -
Amounts disclosed as EPS-Primary and EPS-Diluted represent Basic and
Diluted Earnings per Share as required by Statement of Financial Accounting
Standards No. 125, "Earnings per Share".
</FN>
</TABLE>
