-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DcQvacQQmzT8PTBCfQUoYGmSN2TB//F8jxp+lDWkThKvmsvobt42boQx7p2NLsru D3Nxa2F+THV48ULt67Mb0Q== 0000898430-01-500605.txt : 20010516 0000898430-01-500605.hdr.sgml : 20010516 ACCESSION NUMBER: 0000898430-01-500605 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTEL INC /DE/ CENTRAL INDEX KEY: 0000063276 STANDARD INDUSTRIAL CLASSIFICATION: DOLLS & STUFFED TOYS [3942] IRS NUMBER: 951567322 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05647 FILM NUMBER: 1637501 BUSINESS ADDRESS: STREET 1: 333 CONTINENTAL BLVD CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3102522000 10-Q 1 d10q.txt QUARTERLY REPORT ON FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-05647 ----------- MATTEL, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-1567322 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Continental Boulevard, El Segundo, California 90245-5012 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (310) 252-2000 ---------------------------- (Former name, former address and former fiscal year, if changed since last report) None ------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares outstanding of registrant's common stock, $1.00 par value, (including 1,636,691 common shares issuable upon exchange of outstanding exchangeable shares of Softkey Software Products Inc.) as of May 11, 2001: 430,855,236 shares PART I - FINANCIAL INFORMATION Mattel, Inc. and Subsidiaries Consolidated Balance Sheets
March 31, March 31, 2001 2000 Dec. 31, (In thousands) (Unaudited) (Unaudited) 2000 - ---------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and short-term investments $ 74,279 $ 214,937 $ 232,389 Accounts receivable, net 890,814 897,196 839,567 Inventories 574,031 522,299 489,742 Prepaid expenses and other current assets 188,894 196,762 189,799 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 1,728,018 1,831,194 1,751,497 - ---------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land 32,502 34,696 32,793 Buildings 258,408 264,770 257,430 Machinery and equipment 569,146 549,693 564,244 Capitalized leases 23,271 23,271 23,271 Leasehold improvements 75,419 73,743 74,988 - ---------------------------------------------------------------------------------------------------------------------- 958,746 946,173 952,726 Less: accumulated depreciation 494,454 437,480 472,986 - ---------------------------------------------------------------------------------------------------------------------- 464,292 508,693 479,740 Tools, dies and molds, net 159,310 184,982 168,092 - ---------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 623,602 693,675 647,832 - ---------------------------------------------------------------------------------------------------------------------- OTHER NONCURRENT ASSETS Intangibles, net 1,117,100 1,186,194 1,136,857 Other assets 762,792 542,710 765,671 Net investment in discontinued operations - 318,687 11,540 - ---------------------------------------------------------------------------------------------------------------------- $4,231,512 $4,572,460 $4,313,397 ======================================================================================================================
The accompanying notes are an integral part of these financial statements. 2 Mattel, Inc. and Subsidiaries Consolidated Balance Sheets (Continued)
March 31, March 31, 2001 2000 Dec. 31, (In thousands, except share data) (Unaudited) (Unaudited) 2000 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings $ 518,515 $ 848,698 $ 226,403 Current portion of long-term debt 32,633 2,773 32,723 Accounts payable 244,485 218,106 338,966 Accrued liabilities 448,252 438,682 703,382 Income taxes payable 176,070 164,528 200,933 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 1,419,955 1,672,787 1,502,407 - ------------------------------------------------------------------------------------------------------------------------ LONG-TERM LIABILITIES Long-term debt 1,226,841 982,713 1,242,396 Other 179,436 172,442 165,496 - ------------------------------------------------------------------------------------------------------------------------ Total long-term liabilities 1,406,277 1,155,155 1,407,892 - ------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Special voting preferred stock $1.00 par value, $10.00 liquidation preference per share, one share authorized, issued and outstanding, representing the voting rights of 1.7 million, 2.6 million and 1.6 million outstanding exchangeable shares, respectively - - - Common stock $1.00 par value, 1.0 billion shares authorized; 435.8 million shares, 434.3 million shares and 435.6 million shares issued, respectively 435,773 434,345 435,560 Additional paid-in capital 1,659,230 1,729,447 1,706,614 Treasury stock at cost; 6.7 million shares, 11.8 million shares, and 9.6 million shares, respectively (200,433) (355,453) (288,622) (Accumulated deficit) retained earnings (178,456) 192,043 (144,417) Accumulated other comprehensive loss (310,834) (255,864) (306,037) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 1,405,280 1,744,518 1,403,098 - ------------------------------------------------------------------------------------------------------------------------ $4,231,512 $4,572,460 $4,313,397 ========================================================================================================================
The accompanying notes are an integral part of these financial statements. 3 Mattel, Inc. and Subsidiaries Consolidated Statements of Operations
For the Three Months Ended -------------------------------- March 31, March 31, (Unaudited; in thousands, except per share amounts) 2001 2000 - --------------------------------------------------------------------------------------------------------------------- NET SALES $731,948 $ 693,261 Cost of sales 404,724 378,904 - --------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 327,224 314,357 Advertising and promotion expenses 96,898 91,287 Other selling and administrative expenses 205,319 254,199 Amortization of intangibles 12,810 12,532 Interest expense 34,944 24,356 Other expense (income), net 6,483 (6,373) - --------------------------------------------------------------------------------------------------------------------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (29,230) (61,644) Benefit for income taxes (7,192) (17,014) - --------------------------------------------------------------------------------------------------------------------- LOSS FROM CONTINUING OPERATIONS (22,038) (44,630) DISCONTINUED OPERATIONS Loss from discontinued operations, net of taxes of $(53.0) million - (126,606) - --------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (22,038) (171,236) Cumulative effect of change in accounting principle, net of tax (12,001) - - --------------------------------------------------------------------------------------------------------------------- NET LOSS APPLICABLE TO COMMON SHARES $(34,039) $(171,236) ===================================================================================================================== LOSS PER COMMON SHARE - BASIC Loss from continuing operations $ (0.05) $ (0.10) Loss from discontinued operations - (0.30) Cumulative effect of change in accounting principle (0.03) - - --------------------------------------------------------------------------------------------------------------------- Net loss $ (0.08) $ (0.40) ===================================================================================================================== Weighted average number of common shares 429,936 425,495 ===================================================================================================================== LOSS PER COMMON SHARE - DILUTED Loss from continuing operations $ (0.05) $ (0.10) Loss from discontinued operations - (0.30) Cumulative effect of change in accounting principle (0.03) - - --------------------------------------------------------------------------------------------------------------------- Net loss $ (0.08) $ (0.40) ===================================================================================================================== Weighted average number of common and common equivalent shares 429,936 425,495 ===================================================================================================================== DIVIDENDS DECLARED PER COMMON SHARE $ - $ 0.09 =====================================================================================================================
The accompanying notes are an integral part of these financial statements. 4 Mattel, Inc. and Subsidiaries Consolidated Statements of Cash Flows
For the Three Months Ended -------------------------------- March 31, March 31, (Unaudited; in thousands) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (34,039) $(171,236) Deduct: loss from discontinued operations - (126,606) - -------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations (34,039) (44,630) Adjustments to reconcile loss from continuing operations to net cash flows from operating activities: Cumulative effect of change in accounting principle, net of tax 12,001 - Other noncash charges 12,244 - Depreciation 46,564 47,097 Amortization 14,998 14,088 Increase (decrease) from changes in assets and liabilities: Accounts receivable (63,679) 98,041 Inventories (95,526) (88,324) Prepaid expenses and other current assets (8,302) (3,610) Accounts payable, accrued liabilities and income taxes payable (333,235) (396,844) Other, net 77 7,929 - -------------------------------------------------------------------------------------------------------------------------- Net cash flows used for operating activities of continuing operations (448,897) (366,253) - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of tools, dies and molds (19,177) (21,336) Purchases of other property, plant and equipment (19,443) (15,017) Proceeds from sale of other property, plant and equipment 605 2,212 Other, net 1,755 1,570 - -------------------------------------------------------------------------------------------------------------------------- Net cash flows used for investing activities of continuing operations (36,260) (32,571) - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net 293,245 477,904 Exercise of stock options 37,555 1,722 Payment of dividends on common stock - (38,461) Other, net (146) (543) - -------------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities of continuing operations 330,654 440,622 - -------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR DISCONTINUED OPERATIONS - (73,811) EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,607) (404) - -------------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND SHORT-TERM INVESTMENTS (158,110) (32,417) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 232,389 247,354 - -------------------------------------------------------------------------------------------------------------------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 74,279 $ 214,937 ==========================================================================================================================
The accompanying notes are an integral part of these financial statements. 5 Mattel, Inc. and Subsidiaries Notes To Consolidated Financial Information 1. The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments considered necessary for a fair presentation of Mattel, Inc. and its subsidiaries' ("Mattel") financial position and interim results as of and for the periods presented have been included. Certain amounts in the financial statements for prior periods have been reclassified to conform to the current period's presentation. Because Mattel's business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year. The financial information included herein should be read in conjunction with Mattel's consolidated financial statements and related notes in its 2000 Annual Report to Stockholders filed on Form 10-K. 2. Accounts receivable are shown net of allowances for doubtful accounts of $22.4 million (March 31, 2001), $27.0 million (March 31, 2000), and $24.6 million (December 31, 2000). 3. Inventories are comprised of the following:
(In thousands) March 31, 2001 March 31, 2000 Dec. 31, 2000 ------------------------------------------------------------------------------------------------------------------ Raw materials and work in process $ 45,211 $ 51,232 $ 34,357 Finished goods 528,820 471,067 455,385 ------------------------------------------------------------------------------------------------------------------ $574,031 $522,299 $489,742 ================================================================================================================== 4. Intangibles, net include the following: (In thousands) March 31, 2001 March 31, 2000 Dec. 31, 2000 ------------------------------------------------------------------------------------------------------------------ Goodwill $1,105,003 $1,177,212 $1,124,318 Other 12,097 8,982 12,539 ------------------------------------------------------------------------------------------------------------------ $1,117,100 $1,186,194 $1,136,857 ================================================================================================================== 5. Long-term debt includes the following: (In thousands) March 31, 2001 March 31, 2000 Dec. 31, 2000 ------------------------------------------------------------------------------------------------------------------ Euro notes due 2002 $ 175,340 $ - $ 190,710 Unsecured term loan due 2003 200,000 - 200,000 6% senior notes due 2003 150,000 150,000 150,000 6-1/8% senior notes due 2005 150,000 150,000 150,000 6-3/4% senior notes due 2000 - 100,000 - Medium-term notes 510,000 540,500 510,000 10.15% mortgage note due 2005 41,501 42,213 41,686 ------------------------------------------------------------------------------------------------------------------ $1,226,841 $982,713 $1,242,396 ==================================================================================================================
6 6. Comprehensive loss is as follows:
For the Three Months Ended ----------------------------------------- (In thousands) March 31, 2001 March 31, 2000 ------------------------------------------------------------------------------------------------------ Loss from continuing operations $(22,038) $ (44,630) Loss from discontinued operations - (126,606) Cumulative effect of change in accounting principle (12,001) - ------------------------------------------------------------------------------------------------------ Net loss (34,039) (171,236) Unrealized holding (loss) gain on securities (83) 560 Transition adjustment related to FAS 133 14,127 - Net gain on derivative instruments 3,360 - Currency translation adjustments (22,201) (16,777) ------------------------------------------------------------------------------------------------------ Comprehensive loss $(38,836) $(187,453) ======================================================================================================
7. Supplemental disclosure of cash flow information is as follows:
For the Three Months Ended ---------------------------------------- (In thousands) March 31, 2001 March 31, 2000 ------------------------------------------------------------------------------------------------------------------ Cash payments during the period: Interest $40,074 $27,557 Income taxes 11,232 22,679 Noncash investing and financing activities during the period: Issuance of stock warrant $ - $ 5,789 ------------------------------------------------------------------------------------------------------------------
8. Effective on January 1, 2001, Mattel adopted 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. Mattel's results of operations and cash flows may be impacted by exchange rate fluctuations. Mattel 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, Mattel manages its exposure through the selection of currencies used for international borrowings and intercompany invoicing. Mattel's results of operations can also be affected by the translation of foreign revenues and earnings into US dollars. Mattel does not trade in financial instruments for speculative purposes. At the inception of the contracts, Mattel designates its derivatives as either cash flow or fair value hedges and documents the relationship of the hedge to the underlying forecasted transaction, for cash flow hedges, or the recognized asset or liability, for fair value hedges. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge qualifies for hedge accounting treatment. Changes in fair value associated with hedge ineffectiveness, if any, are recorded in Mattel's results of operations currently. Mattel uses foreign currency forward exchange and option contracts as cash flow hedges, which generally have maturity dates of up to 18 months, to hedge its forecasted purchases and sales of 7 inventory denominated in foreign currencies. Changes in fair value of Mattel's cash flow derivatives are deferred and recorded as part of other comprehensive income (loss) in stockholders' equity until the underlying transaction is settled. Upon settlement, any gain or loss resulting from the derivative is recorded in Mattel's results of operations. Mattel entered into a cross currency interest rate swap to convert the interest rate and principal amount from Euros to US dollars on its 200 million Euro Notes due 2002. The debt and related interest payable are marked-to-market as of each balance sheet date with the change in fair value of the derivative recorded in other comprehensive income (loss) within stockholders' equity until the loan and related interest are paid. Mattel also entered into a fair value hedge to minimize the impact of changes in market value on its results of operations from the securities received as part of the sale of CyberPatrol in 2000. Mattel uses fair value hedges to hedge intercompany loans and management fees denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these contracts. Changes in fair value of these derivatives are recorded in Mattel's results of operations currently. As a result of adopting FAS 133, Mattel recorded a one-time transition adjustment of $12.0 million, net of tax, (or $0.03 per share) as the cumulative effect of change in accounting principle related to unrealized losses on the CyberPatrol securities that had been previously deferred in other comprehensive income (loss). During the first quarter of 2001, Mattel recorded an additional pre-tax loss of $5.5 million in other expense, net related to the decrease in fair value of the derivative. Mattel also recorded a one-time transition adjustment of $2.1 million in other comprehensive income (loss) related to unrealized gains on derivative instruments. As of March 31, 2001, $5.5 million of unrealized gains related to derivative instruments have been recorded in other comprehensive income (loss). Mattel expects to reclassify these unrealized gains from other comprehensive income (loss) to its results of operations over the life of the contracts, generally 18 months or less. 9. As part of its financial realignment plan, Mattel announced during the third quarter of 2000 a change in its dividend policy consisting of a reduction in the annual cash dividend from $0.36 per share to $0.05 per share. No quarterly dividend for the first quarter of 2001 was declared. The $0.05 per share annual dividend rate under the new dividend policy is expected to become effective in December 2001, when and as declared by the board of directors. The board of directors declared a dividend of $0.09 per share in first quarter 2000. 8 10. Basic loss per common share is computed by dividing earnings available to common stockholders by the weighted average number of common shares and common shares obtainable upon the exchange of the exchangeable shares of Mattel's Canadian subsidiary, Softkey Software Products Inc., outstanding during each period. Diluted loss per common share is computed by dividing diluted earnings available to common stockholders by the weighted average number of common shares, common shares obtainable upon the exchange of the exchangeable shares of Mattel's Canadian subsidiary, Softkey Software Products Inc., and other 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, as applicable. Diluted earnings per share presented are the same as basic earnings per share due to Mattel's net loss position. 11. The table below presents information about segment revenues, operating profit and assets. Mattel's reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The domestic segment is further divided into US Girls, US Boys-Entertainment, and US Infant & Preschool. The US Girls segment includes brands such as Barbie(R), Polly Pocket(R), Cabbage Patch Kids(R) and American Girl(R). The US Boys-Entertainment segment includes products in the Wheels and Entertainment categories. The US Infant & Preschool segment includes Fisher-Price(R), Disney preschool and plush, Power Wheels(R), Sesame Street(R) and other preschool products. The International segment sells products in all toy categories. Segment revenues do not include sales adjustments such as trade discounts and other allowances. However, such adjustments are included in the determination of segment income from operations. Segment income from operations represents income from continuing operations before interest expense and income taxes, while consolidated income from operations represents income from continuing operations before income taxes as reported in the consolidated statements of operations. The segment assets are comprised of accounts receivable and inventories, net of applicable reserves and allowances. Certain information presented in the tables below has been restated to conform to the current management structure as of January 2001. Specifically, the results and assets of Pleasant Company, which had been previously reported as part of Other, are now being reported as part of US Girls, which is consistent with management responsibility for this business. Additionally, Mattel's toy manufacturing unit is now being managed as a cost center instead of as a profit center; therefore, toy manufacturing is no longer being reported as a separate segment. Lastly, certain overhead costs incurred at the headquarters' level in El Segundo, including facilities, information technology, and other administration support costs, are now being allocated to the US Girls and US Boys- Entertainment segments, to more accurately reflect the costs associated with operating these businesses. These type of overhead costs were already being reported as part of the US Infant & Preschool and International segments since these businesses maintain their own, separate headquarters locations. 9
(In thousands) March 31, 2001 March 31, 2000 - -------------------------------------------------------------------------------------------------- REVENUES Domestic: US Girls $ 223,553 $ 217,260 US Boys-Entertainment 134,664 117,680 US Infant & Preschool 186,189 183,732 Other 1,436 1,144 - -------------------------------------------------------------------------------------------------- Total Domestic 545,842 519,816 International 234,583 220,234 - -------------------------------------------------------------------------------------------------- 780,425 740,050 Sales adjustments (48,477) (46,789) - -------------------------------------------------------------------------------------------------- Net sales from continuing operations $ 731,948 $ 693,261 ================================================================================================== OPERATING INCOME (LOSS) Domestic: US Girls $ 34,074 $ 29,592 US Boys-Entertainment 1,057 (5,693) US Infant & Preschool (45) 2,059 - -------------------------------------------------------------------------------------------------- Total Domestic 35,086 25,958 International (14,099) (14,597) - -------------------------------------------------------------------------------------------------- 20,987 11,361 Interest expense (34,944) (24,356) Corporate and other (a) (15,273) (48,649) - -------------------------------------------------------------------------------------------------- Loss from continuing operations before income taxes $ (29,230) $ (61,644) ================================================================================================== ASSETS Domestic: US Girls (b) $ 327,387 US Boys-Entertainment (b) 231,909 - -------------------------------------------------------------------------------------------------- 559,296 $ 561,161 US Infant & Preschool 343,431 272,831 - -------------------------------------------------------------------------------------------------- Total Domestic 902,727 833,992 International 485,779 471,079 - -------------------------------------------------------------------------------------------------- 1,388,506 1,305,071 Corporate and other 76,339 114,424 - -------------------------------------------------------------------------------------------------- Accounts receivable and inventories from continuing operations $1,464,845 $1,419,495 ==================================================================================================
(a) For the quarter ended March 31, 2001, corporate and other includes $7.0 million of charges related to the financial realignment plan (see Note 12) and a $5.5 million loss on derivative instruments. For the quarter ended March 31, 2000, corporate and other includes a $53.1 million charge related to the departure of certain senior executives. (b) Asset information was not maintained by individual segment as of March 31, 2000. Mattel sells a broad variety of toy products, which are grouped into three major categories: Girls, Boys-Entertainment and Infant & Preschool. The table below presents worldwide revenues from external customers by category:
(In thousands) March 31, 2001 March 31, 2000 --------------------------------------------------------------------------------------------- Girls $338,018 $316,964 Boys-Entertainment 195,529 180,058 Infant & Preschool 243,066 243,028 Other 3,812 - --------------------------------------------------------------------------------------------- 780,425 740,050 Sales adjustments (48,477) (46,789) --------------------------------------------------------------------------------------------- Net sales from continuing operations $731,948 $693,261 =============================================================================================
10 12. During the third quarter of 2000, Mattel initiated a financial realignment plan designed to improve gross margin; selling, general and administrative expenses; operating profit; and cash flow. The plan will require a total pre-tax charge estimated at $250 million, or $170 million on an after-tax basis. To date, Mattel has recorded pre-tax charges totaling $132.2 million or approximately $88 million on an after-tax basis related to this plan. Of the total charge, $125.2 million (approximately $84 million after-tax) was recorded in 2000 and $7.0 million (approximately $4 million after-tax) was recorded in the first quarter of 2001. In accordance with generally accepted accounting principles, future pre-tax implementation costs of approximately $118 million could not be accrued as of March 31, 2001. These costs will be recorded over the next two years. The following are the major initiatives included in the financial realignment plan: . Reduce excess manufacturing capacity; . Terminate a variety of licensing and other contractual arrangements that do not deliver an adequate level of profitability; . Eliminate product lines that do not meet required levels of profitability; . Improve supply chain performance and economics; . Eliminate approximately 350 positions at US-based headquarters locations in El Segundo, Fisher-Price and Pleasant Company through a combination of layoffs, elimination of open requisitions, attrition and retirements; and . Close and consolidate certain international offices. In 2000, Mattel recorded a pre-tax restructuring charge of $22.9 million in connection with the financial realignment plan, of which approximately $18 million was not yet incurred as of December 31, 2000. This charge related to elimination of positions at headquarters locations in El Segundo, Fisher-Price and Pleasant Company, closure of certain international offices, and consolidation of facilities. Total worldwide headcount reduction as a result of the restructuring is approximately 500 employees. From inception through March 31, 2001, a total of approximately $9 million has been incurred related to the termination of nearly 380 employees, of which approximately 40 were terminated during the first quarter of 2001. The components of the restructuring costs are as follows:
Balance Amounts Balance (In millions) Dec. 31, 2000 Incurred March 31, 2001 -------------------------------------------------------------------------------------------------------------- Severance and other compensation $16 $(6) $10 Lease termination costs 1 - 1 Other 1 (1) - -------------------------------------------------------------------------------------------------------------- Total restructuring charge $18 $(7) $11 ==============================================================================================================
11 Mattel, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT Certain written and oral statements made or incorporated by reference from time to time by Mattel or its representatives in this Quarterly Report on Form 10-Q, other filings or reports filed with the Securities and Exchange Commission, press releases, conferences, or otherwise, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Mattel is including this Cautionary Statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-looking statements. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results, performance, or achievements. Forward-looking statements can be identified by the use of terminology such as "believe," "anticipate," "expect," "estimate," "may," "will," "should," "project," "continue," "plans," "aims," "intends," "likely," or other words or phrases of similar terminology. Management cautions you that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. In addition to the risk factors listed in Mattel's 2000 Annual Report on Form 10-K and other important factors detailed herein and from time to time in other reports filed by Mattel with the Securities and Exchange Commission, including Forms 8-K, 10-Q and 10-K, the following important factors could cause actual results to differ materially from those suggested by any forward-looking statements. Marketplace Risks - - Increased competitive pressure, both domestically and internationally, which may negatively affect the sales of Mattel's products - - Changes in public and consumer preferences, which may negatively affect Mattel's toy business - - Significant changes in the play patterns of children, whereby they are increasingly attracted to more developmentally advanced products at younger ages, which may affect brand loyalty and the perceived value of and demand for Mattel's products - - Possible weaknesses in economic conditions, both domestically and internationally, which may negatively affect the sales of Mattel's products and the costs associated with manufacturing and distributing these products - - Concentration of Mattel's business with a small group of major customers - - Significant buying patterns of major customers - - Shortages of raw materials or components, which may affect Mattel's ability to produce product in time to meet customer demand - - Mattel's inability to accurately predict future consumer demand, including during the peak holiday season 12 Financing Considerations - - Foreign currency exchange fluctuations, which may affect Mattel's reportable income - - Significant increases in interest rates, both domestically and internationally, which may negatively affect Mattel's cost of financing both its operations and investments - - Reductions in Mattel's credit ratings which may negatively impact the cost of satisfying its financing requirements Other Risks - - Mattel's ability to ensure successful implementation of all phases of its financial realignment plan and realization of the anticipated cost savings and improved cash flows - - Development of new technologies, including digital media and the Internet, which may create new risks to Mattel's ability to protect its intellectual property rights or affect the development, marketing and sales of Mattel's products - - Changes in laws or regulations, both domestically and internationally, including those affecting the Internet, consumer products, environmental activities, import and export laws or trade restrictions, which may lead to increased costs or interruption in normal business operations of Mattel - - Deterioration of trade relations between the US and foreign countries in which Mattel has significant manufacturing facilities or other operations - - Current and future litigation, governmental proceedings or environmental matters, which may lead to increased costs or interruption of normal business operations of Mattel - - Labor disputes, which may lead to increased costs or disruption of any of Mattel's operations The risks included herein are not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors, which could materially and adversely impact Mattel's business, financial condition and results of operations. Moreover, Mattel operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict the impact of all such risk factors on Mattel's business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward- looking statements as a prediction of actual results. SUMMARY The following discussion should be read in conjunction with the consolidated financial statements and related notes that appear in Part I of this Quarterly Report. Mattel's consolidated financial statements for all periods present the Consumer Software segment as a discontinued operation. Unless otherwise indicated, the following discussion relates only to Mattel's continuing operations. Additionally, the segment and brand category information was restated from prior period presentation to conform to the current management structure. Mattel designs, manufactures, and markets a broad variety of toy products on a worldwide basis through both sales to retailers (i.e., "customers") and direct to consumers. Mattel's business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines, to 13 design and develop innovative new products and product lines, and to successfully market those products and product lines. Mattel plans to continue to focus on its portfolio of traditional brands that have historically had worldwide sustainable appeal, to create new brands utilizing its knowledge of children's play patterns and to target customer and consumer preferences around the world. Mattel also intends to expand its core brands through the Internet, and licensing and entertainment partnerships. Mattel's portfolio of brands and products are grouped in the following categories: Girls - including Barbie(R) fashion dolls and accessories, collector dolls, Cabbage Patch Kids(R), Polly Pocket(R), Diva Starz(TM), and American Girl(R) Boys-Entertainment - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing and Tyco(R) Radio Control (collectively "Wheels"), and Disney, Nickelodeon(R), Harry Potter(TM), Max Steel(TM), and games and puzzles (collectively "Entertainment") Infant & Preschool - including Fisher-Price(R), Power Wheels(R), Sesame Street(R), Disney preschool and plush, Winnie the Pooh(R), Blue's Clues(R), See `N Say(R), Magna Doodle(R), and View-Master(R) Mattel's business is seasonal, and, therefore, results of continuing operations are comparable only with corresponding periods. FINANCIAL REALIGNMENT PLAN During the third quarter of 2000, Mattel initiated a financial realignment plan designed to improve gross margin; selling, general and administrative expenses; operating profit; and cash flow. The financial realignment plan, together with the disposition of Learning Company, was part of management's strategic plan to focus on growing Mattel's core brands and lowering operating costs and interest expense. The plan will require a total pre-tax charge estimated at approximately $250 million, or $170 million on an after-tax basis, of which approximately $100 million represents cash expenditures and $70 million represents noncash writedowns. Total cash outlay will be funded from existing cash balances and internally generated cash flows from operations. To date Mattel has recorded pre-tax charges totaling $132.2 million, or approximately $88 million on an after-tax basis, related to this plan. Of the total charge, $125.2 million (approximately $84 million after-tax) was recorded in 2000 and $7.0 million (approximately $4 million after-tax) was recorded in the first quarter of 2001. In accordance with generally accepted accounting principles, future pre-tax implementation costs of approximately $118 million could not be accrued as of March 31, 2001. These costs will be recorded over the next two years. In April 2001, as part of the financial realignment plan, Mattel announced the closure of one of its North American distribution and manufacturing facilities. Over the next two years, production from the Murray, Kentucky, facility will be consolidated into existing Mattel-owned and operated facilities in North America with the final shutdown of Murray expected in late 2002. This action is one of the realignment measures taken to lower costs. Mattel believes this action was necessary in order to maintain a competitive cost structure in today's global marketplace. 14 The following are the major initiatives included in the financial realignment plan: . Reduce excess manufacturing capacity; . Terminate a variety of licensing and other contractual arrangements that do not deliver an adequate level of profitability; . Eliminate product lines that do not meet required levels of profitability; . Improve supply chain performance and economics; . Eliminate approximately 350 positions at US-based headquarters locations in El Segundo, Fisher-Price and Pleasant Company through a combination of layoffs, elimination of open requisitions, attrition and retirements; and . Close and consolidate certain international offices. In 2000, Mattel recorded a pre-tax restructuring charge of $22.9 million in connection with the financial realignment plan, of which approximately $18 million was not yet incurred as of December 31, 2000. This charge related to elimination of positions at headquarters locations in El Segundo, Fisher-Price and Pleasant Company, closure of certain international offices, and consolidation of facilities. Total worldwide headcount reduction as a result of the restructuring is approximately 500 employees. From inception through March 31, 2001, a total of approximately $9 million has been incurred related to the termination of nearly 380 employees, of which approximately 40 were terminated during the first quarter of 2001. The components of the restructuring costs are as follows:
Balance Amounts Balance (In millions) Dec. 31, 2000 Incurred March 31, 2001 - -------------------------------------------------------------------------------------------------------------- Severance and other compensation $16 $(6) $10 Lease termination costs 1 - 1 Other 1 (1) - - -------------------------------------------------------------------------------------------------------------- Total restructuring charge $18 $(7) $11 ==============================================================================================================
Under the plan, Mattel expects to generate approximately $200 million of pre-tax cost savings over the next three years. Mattel has completed over three- quarters of the activities needed in order to recognize approximately $55 million in savings targeted for 2001. However, there is no assurance that Mattel will be able to successfully implement all phases of its financial realignment plan or that it will realize the anticipated cost savings and improved cash flows. RESULTS OF CONTINUING OPERATIONS Consolidated Results Net loss from continuing operations for the first quarter of 2001 was $22.0 million or $0.05 per diluted share as compared to a net loss from continuing operations of $44.6 million or $0.10 per diluted share in the first quarter of 2000. Profitability in the first quarter of 2001 was negatively impacted by a $7.0 million pre-tax charge 15 related to the financial realignment plan and a $5.5 million charge related to pre-tax loss on derivative instruments. The combined effect of the above items resulted in pre-tax charges of $12.5 million, approximately $10 million after-tax or $0.02 per diluted share. Profitability in the first quarter of 2000 was negatively impacted by a $53.1 million pre-tax charge, approximately $38 million after-tax or $0.09 per diluted share, related to the departure of certain senior executives. The following table provides a comparison of the reported results and the results excluding charges:
For the Three Months Ended March 31, --------------------------------------------------------------- 2001 2000 --------------------------------------------------------------- Reported Results Reported Results (In millions) Results Charges Ex. Chgs Results Charges Ex. Chgs ====================================================================================================== Net sales $731.9 $ - $731.9 $693.3 $ - $693.3 ====================================================================================================== Gross profit $327.2 $ (6.6) $333.8 $314.4 $ - $314.4 Advertising and promotion expenses 96.9 0.3 96.6 91.3 - 91.3 Other selling and administrative expenses 205.3 0.1 205.2 254.2 53.1 201.1 Amortization of intangibles 12.8 - 12.8 12.5 - 12.5 Other expense (income), net 6.5 5.5 1.0 (6.4) - (6.4) - ------------------------------------------------------------------------------------------------------ Operating income 5.7 (12.5) 18.2 (37.2) (53.1) 15.9 Interest expense 34.9 - 34.9 24.4 - 24.4 - ------------------------------------------------------------------------------------------------------ Loss from continuing operations before income taxes $(29.2) $(12.5) $(16.7) $(61.6) $(53.1) $ (8.5) ======================================================================================================
Net sales from continuing operations in the first quarter of 2001 increased 6% from last year to $731.9 million. Sales within the US increased 5% and accounted for 70% of consolidated sales in the first quarter of both 2001 and 2000. Sales outside the US increased 7% from the year ago quarter. However, excluding the unfavorable exchange impact, international sales increased by 13% compared to 2000. Worldwide sales in the Girls category, which now includes the Pleasant Company, increased 7% or 9% in local currency to $338.0 million. Excluding Pleasant Company, worldwide sales for the Girls category were up 5.5% compared to 2000. Worldwide Barbie(R) sales were flat, or up 2% in local currency. Barbie(R) sales in the U.S. declined 8% in the quarter due to changes in buying patterns of Mattel's customers. Consumer demand for the brand continued to be strong in the first quarter as evidenced by healthy growth in over-the-counter sales. International sales for Barbie(R) were up 16%, or 23% in local currency, reflecting the benefit of early product availability and stronger alignment of worldwide sales and marketing plans. The performance of Polly Pocket(R), Diva Starz(TM) and Pleasant Company drove the growth in the Girls category. Worldwide sales in the Boys-Entertainment category grew 9%, or 11% in local currency, to $195.5 million in 2001. Domestic sales grew by 14% while international sales declined 2%, or up 4% in local currency. The Wheels business experienced double-digit growth, driven by Hot Wheels(R) and Tyco(R) Radio Control, primarily due to reduced retail inventory levels entering the year, improved product availability and strong product offerings. The Entertainment business decreased slightly with strength in Max Steel(TM) and games and puzzles, 16 offset by weakness in Disney movie-related properties. Mattel expects that over time the growth within the Harry Potter(TM) product line will replace the loss in sales resulting from the discontinuation of the Disney entertainment licensing agreement. Worldwide sales in the Infant & Preschool category were $243.1 million in 2001, or flat for the quarter, but up 2% in local currency. Domestic sales were up 1% and international sales were down 4%, or up 2% in local currency. Worldwide sales of core Fisher-Price(R) products were up 8%, including double-digit growth internationally. The growth in core Fisher-Price(R) and Power Wheels(R) products was offset by continued weakness in licensed character brands, as retailers manage their inventories. Mattel expects the trend to reverse in the second half as the new character brand products are introduced at retail. Mattel has also initiated programs to extend its core brands. In December 2000 and January 2001, Mattel entered into two worldwide, multi-year licensing agreements with Vivendi Universal Publishing and THQ, respectively, for the development and publishing of gaming, educational and productivity software based on Mattel's brands. These partnerships allow Mattel to provide the content from its library of power brands, while Vivendi Universal Publishing and THQ provide software development and distribution expertise. In February, Mattel announced a partnership enabling the Infant and Preschool Division to license Barney(R) products. Another brand extension initiative is the release of the first Barbie(R) movie, "Barbie in the Nutcracker(TM)", that will air in Thanksgiving 2001 on CBS Television and available for home video. Gross profit, as a percentage of net sales, was 44.7% in 2001 compared to 45.3% last year. Reported cost of sales includes a $6.6 million charge related to accelerated depreciation resulting from the planned closure of the Murray, Kentucky plant as part of the financial realignment plan. Mattel will incur an accelerated depreciation charge each quarter until the second quarter of 2002 related to this closure. Excluding the charge for accelerated depreciation, gross profit, as a percentage of net sales, was 45.6% in the first quarter of 2001 compared to 45.3% in 2000. The margin was positively affected by product mix and lower distribution costs, partially offset by the negative impact of the weakened Euro. Excluding the charge related to exiting certain product lines, advertising and promotion was 13.2% of net sales, consistent with last year. The full year advertising rate, excluding charges, is expected to be 15.0% of net sales. In the first quarter of 2000, other selling and administrative expenses include a $53.1 million charge related to termination costs for the departure of senior executives. Excluding this charge, other selling and administrative expenses declined from 29.0% of net sales in 2000 to 28.0% in 2001. 17 Excluding a charge related to a pre-tax loss on derivative instruments, other expense (income), net decreased from income of $6.4 million in 2000 to expense of $1.0 million in 2001, primarily due to favorable foreign exchange and investment gains in 2000 compared to 2001. Interest expense was $34.9 million in 2001 compared to $24.4 million last year. However, the increase is primarily due to the allocation last year of $8.2 million in interest to discontinued operations. In first quarter 2001, interest expense was allocated entirely to continuing operations. Interest expense for full year 2001 is expected to be approximately the same as the $189 million of total interest expense incurred for 2000 for continuing and discontinued operations combined. Mattel's first quarter tax rate, excluding charges, was 27.6%, consistent with the targeted rate for the year. Business Segment Results Mattel's reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The domestic segment is further divided into US Girls, US Boys-Entertainment, and US Infant & Preschool. The US Girls segment includes products such as Barbie(R), Polly Pocket(R), Cabbage Patch Kids(R), and American Girl(R). The US Boys- Entertainment segment includes products in the Wheels and Entertainment categories. The US Infant & Preschool segment includes Fisher-Price(R), Disney preschool and plush, Power Wheels(R), Sesame Street(R) and other preschool products. The International segment sells products in all toy categories. Mattel's segments were revised in January 2001 to conform to the current management structure. Specifically, the results of Pleasant Company, which had been previously reported as part of Other, are now being reported as part of US Girls, which is consistent with management responsibility for this business. Additionally, Mattel's toy manufacturing unit is now being managed as a cost center instead of as a profit center, therefore, toy manufacturing is no longer being reported as a separate segment. Lastly, certain overhead costs incurred at the headquarters' level in El Segundo, including facilities, information technology, and other administration support costs, are now being allocated to the US Girls and US Boys-Entertainment segments, to more accurately reflect the costs associated with operating these businesses. These type of overhead costs were already being reported as part of the US Infant & Preschool and international segments since these businesses maintain their own, separate headquarters locations. US Girls segment sales increased by 3% in 2001 compared to 2000, largely due to growth in the small doll product line, including Polly Pocket(R) and Diva Starz(TM), and increased sales of American Girl(R). Barbie(R) sales in the U.S. declined 8% in the quarter due to changes in buying patterns of Mattel's customers. Consumer demand for the brand continued to be strong in the first quarter as evidenced by healthy growth in over-the-counter sales. US Boys- Entertainment segment sales increased 14% compared to 2000. The Wheels business experienced double-digit growth, driven by Hot Wheels(R) and Tyco(R) Radio Control. The Entertainment business increased 6%, with strength in Max Steel(TM) and games and puzzles partially offset by weakness in Disney movie-related properties. US Infant & Preschool segment sales increased 1%, largely due to increased sales of core Fisher-Price(R) and Power Wheels(R) products, partially offset by declines in sales of Sesame Street(R), Disney preschool and Winnie the Pooh(R) products. International segment sales increased by 7% compared to last year. Excluding the unfavorable foreign exchange impact, sales grew by 13% due to double-digit growth in Barbie(R), Fisher-Price(R) and Wheels categories. Operating profit in the US Girls segment increased by 15%, largely due to higher sales and improved product mix at Pleasant Company. Excluding Pleasant Company, profitability in the US Girls segment remained relatively flat. Operating (loss) profit in the US Boys-Entertainment segment improved from a loss of $5.7 million in 2000 to profit of $1.1 million in 2001 due to increased sales and improved product mix. Operating profit in the US Infant & Preschool segment decreased from profit of $2.1 million last year to breakeven this year primarily due to unfavorable product mix and increased overhead spending to support certain product lines. The International segment operating loss of $14.1 million is a slight improvement from a year ago. In both years, the international results were negatively affected by unfavorable foreign exchange. 18 FINANCIAL POSITION Mattel's cash and short-term investments decreased $140.6 million to $74.3 million at March 31, 2001 compared to $214.9 million at March 31, 2000. The repayment of short-term borrowings and long-term debt, the funding of continuing operations and payments made under the financial realignment plan, partially offset by the issuance of 200 million Euro Notes and a $200.0 million term loan, contributed to the decrease. Compared to year end 2000, cash and short-term investments decreased $158.1 million, primarily due to funding of continuing operations, partially offset by short-term borrowings. Accounts receivable, net increased by $51.2 million from year-end 2000. Inventory balances increased $51.7 million from first quarter 2000, primarily as a result of pre-build initiatives to prepare for the closing of the Murray, Kentucky manufacturing facility as part of Mattel's financial realignment plan. Since year end, inventory increased $84.3 million as a result of routine inventory buildup to support sales later in the year and the pre-build initiative related to the Murray closure. Property, plant and equipment, net decreased $70.1 million from first quarter 2000, mainly due to depreciation, partially offset by tooling additions. Intangibles, net decreased $69.1 million compared to the year-ago quarter, largely due to amortization. Other assets increased $220.1 million from the first quarter of 2000, principally due to increased noncurrent deferred tax assets resulting from operating losses. Net investment in discontinued operations decreased $318.7 million from first quarter 2000, primarily due to the disposition of Learning Company. Short-term borrowings decreased $330.2 million compared to first quarter 2000. Compared to 2000 year end, short-term borrowings increased $292.1 million to support seasonal working capital financing needs. Current portion of long-term liabilities increased $29.9 million over the 2000 quarter end, primarily due to the reclassification of $30.5 million of medium-term notes maturing in 2001 from long-term debt. A summary of Mattel's capitalization is as follows:
(In millions, except percentage information) March 31, 2001 March 31, 2000 Dec. 31, 2000 - --------------------------------------------------------------------------------------- Medium-term notes $ 510.0 18% $ 540.5 19% $ 510.0 18% Senior notes 675.3 24 400.0 14 690.7 25 Other long-term debt obligations 41.5 2 42.2 1 41.7 1 - --------------------------------------------------------------------------------------- Total long-term debt 1,226.8 44 982.7 34 1,242.4 44 Other long-term liabilities 179.4 6 172.5 6 165.5 6 Stockholders' equity 1,405.3 50 1,744.5 60 1,403.1 50 - --------------------------------------------------------------------------------------- $2,811.5 100% $2,899.7 100% $2,811.0 100% =======================================================================================
19 Total long-term debt increased by $244.1 million compared to first quarter 2000 due to the issuance of 200 million of Euro Notes and a $200.0 million term loan during third quarter 2000, partially offset by the repayment upon maturity of $100.0 million of senior notes and the reclassification of $30.5 million of medium-term notes maturing in 2001 to current portion. Mattel expects to satisfy its future long-term capital needs through the retention of corporate earnings and the issuance of long-term debt instruments. As of March 31, 2001, Mattel has up to $400.0 million of debt and equity securities available for issuance under its current shelf registration statement. Stockholders' equity decreased $339.2 million since March 31, 2000, primarily as a result of cumulative losses from discontinued operations, common dividends declared and the unfavorable effect of foreign currency translation, partially offset by income from continuing operations and cash received from exercise of employee stock options. LIQUIDITY Cash flows used for continuing operations increased $82.6 million compared to first quarter 2000, largely due to changes in working capital. During first quarter 2001, Mattel invested cash flows totaling $38.6 million for additions to tooling in support of new products and expansion of existing North American manufacturing facilities in anticipation of the closure of the Murray, Kentucky facility. Cash flows from financing activities decreased $110.0 million due to lower short-term borrowings, partially offset by cash received from employee stock option exercises and no dividend payment during the quarter under Mattel's new dividend policy. During 2001, Mattel expects cash flows to increase due to the change in its dividend policy and the disposition of Learning Company since Mattel is no longer required to fund this business. Mattel currently intends to use the cash savings generated by these actions to reduce debt, and thereby strengthen its balance sheet. SEASONAL FINANCING Mattel's financing of seasonal working capital, as well as that of the industry taken as a whole, 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 when inventories are at their highest in anticipation of expected second half sales volume. Mattel expects to finance its seasonal working capital requirements for the next twelve months by using existing and internally generated cash, issuing commercial paper, selling certain trade receivables and using various short-term bank lines of credit. On March 29, 2001, Mattel renewed its $400.0 million, 364-day credit facility. In addition, Mattel 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 subsidiaries. Mattel believes the amounts available under its unsecured committed revolving credit facilities, its term loan agreement, its uncommitted money market facility and its foreign credit lines will be adequate to meet its seasonal financing requirements. RISK MANAGEMENT Foreign Currency Mattel's results of operations and cash flows may be impacted by exchange rate fluctuations. Mattel seeks to mitigate its exposure to market risk by monitoring its currency exchange exposure for the year and partially or fully hedging such exposure using foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure through the selection of currencies used for international borrowings and intercompany invoicing. Mattel's results of operations can also be affected by the translation of foreign revenues and earnings into US dollars. Mattel does not trade in financial instruments for speculative purposes. Mattel has also entered into a cross currency interest rate swap to convert the interest and principal amount from Euros to US dollars on its 200 million Euro Notes due 2002. 20 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Litigation Related to Learning Company Following Mattel's announcement in October 1999 of the expected results of its Learning Company division for the third quarter of 1999, several of Mattel's stockholders filed purported class action complaints naming Mattel and certain of its present and former officers and directors as defendants. The complaints generally allege, among other things, that the defendants made false or misleading statements, in the joint proxy statement for the merger of Mattel and Learning Company and elsewhere, that artificially inflated the price of Mattel's common stock. In March 2000, these shareholder complaints were consolidated into two lead cases: Thurber v. Mattel, Inc. et al. (containing claims under (S) 10(b) of the ------------------------------ 1934 Securities Exchange Act ("Act")) and Dusek v. Mattel, Inc. et al --------------------------- (containing claims under (S) 14(a) of the Act). Mattel and the other defendants filed motions to dismiss both lawsuits for failure to state a claim. In January 2001, the Court granted defendants' motions to dismiss both Thurber and Dusek, ------- ----- and gave plaintiffs leave to amend. Plaintiffs filed amended consolidated complaints in March 2001 in both actions. Mattel intends to file motions to dismiss the amended consolidated complaints. Other purported class action litigation has been brought against Mattel as successor to Learning Company and the former directors of Learning Company on behalf of former stockholders of Broderbund Software, Inc. who acquired shares of Learning Company in exchange for their Broderbund common stock in connection with the Learning Company-Broderbund merger on August 31, 1998. The consolidated complaint in In re Broderbund generally alleges that Learning ---------------- Company misstated its financial results prior to the time it was acquired by Mattel. Mattel and the other defendants have filed a motion to dismiss the complaint in In re Broderbund, and are awaiting a ruling. Thurber, Dusek, and ---------------- ------- ----- In re Broderbund are all currently pending in the United States District Court - ---------------- for the Central District of California. Several stockholders have filed derivative complaints on behalf and for the benefit of Mattel, alleging, among other things, that Mattel's directors breached their fiduciary duties, wasted corporate assets, and grossly mismanaged Mattel in connection with Mattel's acquisition of Learning Company and its approval of severance packages to certain former executives. All of these derivative actions, one of which was filed in the Court of Chancery in Delaware and the remainder in Los Angeles Superior Court in California, have been stayed pending the outcome of motions to dismiss in the federal securities actions. Mattel believes the purported class actions and derivative suits are without merit and intends to defend them vigorously. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -------- 11.0 Computation of Income (Loss) 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 99.0 Mattel, Inc. Credit Agreement (364-Day Facility) dated as of March 29, 2001 among Mattel, the Banks (as defined), Bank of America, N.A., as administrative agent, Citicorp USA, Inc., as syndication agent, and ABN AMRO Bank N.V., as documentation agent (b) Reports on Form 8-K ------------------- Mattel filed no Current Reports on Form 8-K during the quarterly period ended March 31, 2001. 22 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTEL, INC. ------------------------------------ (Registrant) Date: As of May 15, 2001 By: /s/ Kevin M. Farr ------------------ -------------------------------- Kevin M. Farr Chief Financial Officer 23 EX-11 2 dex11.txt COMPUTATION OF INCOME (LOSS) PER SHARE EXHIBIT 11.0 (Page 1 of 2) MATTEL, INC. AND SUBSIDIARIES COMPUTATION OF (LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except per share amounts)
For the Three Months Ended ---------------------- March 31, March 31, 2001 2000 --------- --------- BASIC - ----- Loss from continuing operations $(22,038) $ (44,630) Loss from discontinued operations - (126,606) Cumulative effect of change in accounting principles (12,001) - -------- --------- Net loss applicable to common shares $(34,039) $(171,236) ======== ========= Applicable Shares for Computation of Loss per Share: Weighted average common shares outstanding 429,936 425,495 ======== ========= Loss Per Common Share - Basic Loss from continuing operations $ (0.05) $ (0.10) Loss from discontinued operations - (0.30) Cumulative effect of change in accounting principles (0.03) - -------- -------- Net loss per common share $ (0.08) $ (0.40) ======== ========
EXHIBIT 11.0 (Page 2 of 2) MATTEL, INC. AND SUBSIDIARIES COMPUTATION OF (LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE (In thousands, except per share amounts)
For the Three Months Ended --------------------- March 31, March 31, 2001 2000 --------- --------- DILUTED - ------- Loss from continuing operations $(22,038) $ (44,630) Loss from discontinued operations - (126,606) Cumulative effect of change in accounting principles (12,001) - -------- --------- Net loss applicable to common shares $(34,039) $(171,236) ======== ========= Applicable Shares for Computation of Loss per Share: Weighted average common shares outstanding 429,936 425,495 Weighted average common equivalent shares arising from: Dilutive stock options - - Stock warrants - - -------- --------- Weighted average number of common and common equivalent shares 429,936 425,495 ======== ========= Loss Per Common Share - Diluted Loss from continuing operations $ (0.05) $ (0.10) Loss from discontinued operations - (0.30) Cumulative effect of change in accounting principles (0.03) - -------- --------- Net loss per common share $ (0.08) $ (0.40) ======== =========
EX-12 3 dex12.txt COMPUTATION OF RATIO OF EARNINGS TO CHARGES EXHIBIT 12 (PAGE 1 0F 2) MATTEL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Amounts in thousands, except ratios) (Unaudited)
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31,(a)(b) ------------------------------- ------------------------------------------------------------------- March 31, March 31, 2001 2000 2000 1999 1998 1997 1996 ------------ -------------- ---------- --------- ---------- --------- ----------- EARNINGS AVAILABLE FOR FIXED CHARGES: Income (loss) from continuing operations before income taxes, cumulative effect of changes in accounting principles and extraordinary items ($29,230) ($61,644) $225,424 $170,164 $459,446 $425,082 $536,756 Less (plus) minority interest and undistributed income (loss) of less- than-majority-owned affiliates, net 123 195 440 145 (165) (144) 303 Add: Interest expense 34,944 24,356 152,979 131,609 110,833 90,130 100,226 Appropriate portion of rents (c) 4,325 3,288 14,748 11,974 16,262 17,665 19,527 ---------- ----------- ---------- ---------- ---------- ---------- ---------- Earnings available for fixed charges $ 10,162 ($33,805) $393,591 $313,892 $586,376 $532,733 $656,812 ========== =========== ========== ========== ========== ========== ========== FIXED CHARGES: Interest expense $ 34,944 $ 24,356 $152,979 $131,609 $110,833 $ 90,130 $100,226 Capitalized interest - 49 507 527 993 991 1,789 Appropriate portion of rents (c) 4,325 3,288 14,748 11,974 16,262 17,665 19,527 ---------- ----------- ---------- --------- ---------- ---------- ---------- Fixed charges $ 39,269 $ 27,693 $168,234 $144,110 $128,088 $108,786 $121,542 ========== =========== ========== ========= ========== ========== ========== Ratio of earnings to fixed charges 0.26 (d) (1.22)(e) 2.34 X 2.18 X 4.58 X 4.90 X 5.40 X ========== =========== ========== ========= ========== =========== ==========
(a) Although Mattel merged with The Learning Company, Inc. ("Learning Company") in May 1999, the results of operations of Learning Company have not been included in this calculation since the Consumer Software segment was seported as a discontinued operation effective March 31, 2000. (b) The ratio of earnings to fixed charges for 1996 and 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. (c) Portion of rental expenses which is deemed representative of an interest factor, not to exceed one-third of total rental expense. (d) Earnings did not cover fixed charges by $29.1 million for the three-month period ended March 31, 2001. (e) Primarily as a result of a $53.1 million charge to earnings taken in the first quarter of 2000 related to the departure of certain senior executives, earnings did not cover fixed charges by $61.5 million for the three-month period ended March 31, 2000. EXHIBIT 12 (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) (Unaudited)
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, (a)(b) ----------------------------- ----------------------------------------------------------------- March 31, March 31, 2001 2000 2000 1999 1998 1997 1996 ----------------------------- ----------------------------------------------------------------- EARNINGS AVAILABLE FOR FIXED CHARGES: Income (loss) from continuing operations before income taxes, cumulative effect of changes in accounting principles and extraordinary items ($29,230) ($61,644) $225,424 $170,164 $459,446 $425,082 $536,756 Less (plus) minority interest and undistributed income (loss) of less-than- majority-owned affiliates, net 123 195 440 145 (165) (144) 303 Add: Interest expense 34,944 24,356 152,979 131,609 110,833 90,130 100,226 Appropriate portion of rents (c) 4,325 3,288 14,748 11,974 16,262 17,665 19,527 ---------- --------- ---------- ---------- ---------- ---------- ---------- Earnings available for fixed charges $10,162 ($33,805) $393,591 $313,892 $586,376 $532,733 $656,812 ========== ========= ========== ========== ========== ========== ========== FIXED CHARGES: Interest expense $34,944 $24,356 $152,979 $131,609 $110,833 $90,130 $100,226 Capitalized interest - 49 507 527 993 991 1,789 Dividends - Series B preferred stock - - - - - 2,537 3,406 Dividends - Series C preferred stock - - - 3,980 7,960 7,968 3,985 Appropriate portion of rents (c) 4,325 3,288 14,748 11,974 16,262 17,665 19,527 ---------- --------- ---------- ---------- ---------- ---------- ---------- Fixed charges $39,269 $27,693 $168,234 $148,098 $136,048 $119,291 $128,933 ========== ========= ========== ========== ========== ========== ========== Ratio of earnings to combined fixed charges and preferred stock dividends 0.26 (d) (1.22) (e) 2.34 X 2.12 X 4.31 X 4.47 X 5.09 X ========== ========= ========== ========== ========== ========== ==========
(a) Although Mattel merged with Learning Company in May 1999, the results of operations of Learning Company have not been included in this calculation since the Consumer Software segment was reported as a discontinued operation effective March 31, 2000. (b) The ratio of earnings to combined fixed charges and preferred stock dividends for 1996 and 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. (c) Portion of rental expenses which is deemed representative of an interest factor, not to exceed one-third of total rental expense. (d) Earnings did not cover fixed charges by $29.1 million for the three-month period ended March 31, 2001. (e) Primarily as a result of a $53.1 million charge to earnings taken in the first quarter of 2000 related to the departure of certain senior executives, earnings did not cover fixed charges by $61.5 million for the three-month period ended March 31, 2000. EX-99.0 4 dex990.txt MATTEL CREDIT AGREEMENT (364-DAY FACILITY) EXHIBIT 99.0 ================================================================================ Credit Agreement (364-Day Facility) Dated as of March 29, 2001 among Mattel, Inc. Bank of America, N.A., as Administrative Agent Citicorp USA, Inc., as Syndication Agent ABN AMRO Bank N.V., as Documentation Agent and The Other Financial Institutions Party Hereto Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager [LOGO OF BANK OF AMERICA] ================================================================================ TABLE OF CONTENTS SECTION 1. DEFINITIONS.................................................. 1 1.01 Certain Defined Terms....................................... 1 1.02 Other Definitional Provisions............................... 12 SECTION 2. THE COMMITMENTS.............................................. 12 2.01 The Commitments............................................. 12 2.02 Loan Accounts and Notes..................................... 12 2.03 Borrowing Procedure......................................... 13 2.04 Conversion and Continuation Elections....................... 13 2.05 Reduction and Termination of Commitments.................... 14 2.06 Voluntary Prepayments....................................... 15 2.07 Repayment of Loans.......................................... 15 2.08 Interest on the Loans....................................... 15 2.09 Fees........................................................ 16 2.10 Calculation of Interest and Fees............................ 17 2.11 Payments by the Company..................................... 17 2.12 Payments by the Banks to the Administrative Agent........... 17 2.13 Sharing of Payments, Etc.................................... 18 SECTION 3. PAYMENTS IN GENERAL.......................................... 19 3.01 Taxes....................................................... 19 3.02 Capital Adequacy............................................ 21 3.03 Illegality.................................................. 22 3.04 Increased Costs and Reduction of Return..................... 22 3.05 Funding Losses.............................................. 22 3.06 Inability to Determine Rates................................ 23 3.07 Survival.................................................... 23 SECTION 4. CONDITIONS PRECEDENT......................................... 23 4.01 Conditions to Effectiveness................................. 23 4.02 Conditions to All Loans..................................... 25 SECTION 5. REPRESENTATIONS AND WARRANTIES............................... 25 5.01 Organization and Powers..................................... 26 5.02 Good Standing............................................... 26 5.03 Material Subsidiaries....................................... 26 5.04 Authorization of Borrowing.................................. 26 5.05 No Conflict................................................. 26 5.06 Governmental Consents....................................... 27 5.07 Binding Obligation.......................................... 27 5.08 Financial Condition......................................... 27 5.09 Changes, Etc................................................ 27 5.10 Title to Properties......................................... 27 5.11 Litigation; Adverse Facts................................... 28 5.12 Payment of Taxes............................................ 28 5.13 Agreements.................................................. 28 5.14 Performance................................................. 28 5.15 Governmental Regulation..................................... 29 5.16 Employee Benefit Plans...................................... 29 5.17 Environmental Matters....................................... 29
-i- Mattel, Inc. 364-Day Facility 5.18 Disclosure................................................. 29 5.19 Subordination Agreements................................... 29 SECTION 6. AFFIRMATIVE COVENANTS....................................... 30 6.01 Reporting and Information Requirements..................... 30 6.02 Corporate Existence, Etc................................... 32 6.03 Payment of Taxes and Claims; Tax Consolidation............. 32 6.04 Maintenance of Properties; Insurance....................... 33 6.05 Inspection of Property and Books and Records............... 33 6.06 Use of Proceeds of Loans................................... 33 6.07 Environmental Laws......................................... 33 6.08 Subordination Agreements................................... 33 SECTION 7. NEGATIVE COVENANTS.......................................... 34 7.01 Secured Indebtedness....................................... 34 7.02 Liens...................................................... 34 7.03 Restriction on Fundamental Changes......................... 34 7.04 Sale or Discount of Receivables............................ 35 7.05 Consolidated Funded Indebtedness to Total Capitalization... 35 7.06 Interest Coverage Ratio.................................... 36 7.07 ERISA...................................................... 36 7.08 Margin Regulations......................................... 36 7.09 Independence of Covenants.................................. 36 SECTION 8. EVENTS OF DEFAULT........................................... 36 8.01 Events of Default.......................................... 37 8.02 Remedies................................................... 39 8.03 Rights Not Exclusive....................................... 39 SECTION 9. THE ADMINISTRATIVE AGENT.................................... 39 9.01 Appointment and Authorization.............................. 39 9.02 Delegation of Duties....................................... 40 9.03 Liability of Administrative Agent.......................... 40 9.04 Reliance by Administrative Agent........................... 40 9.05 Notice of Default.......................................... 41 9.06 Credit Decision............................................ 41 9.07 Indemnification............................................ 42 9.08 Administrative Agent in Individual Capacity................ 43 9.09 Successor Administrative Agent............................. 43 9.10 Syndication Agent and Documentation Agent.................. 43 SECTION 10. MISCELLANEOUS.............................................. 44 10.01 Assignments, Participations, Etc........................... 44 10.02 Survival of Warranties and of Certain Agreements........... 46 10.03 Failure or Indulgence Not Waiver; Remedies Cumulative...... 46 10.04 Fees and Expenses.......................................... 46 10.05 Set Off.................................................... 46 10.06 Notices.................................................... 47 10.07 Severability............................................... 47 10.08 Amendments and Waivers..................................... 47 10.09 Obligations Several........................................ 48 10.10 Certain Changes............................................ 48 10.11 Headings................................................... 48
- ii - Mattel, Inc. 364-Day Facility 10.12 Applicable Law............................................. 49 10.13 Successors and Assigns..................................... 49 10.14 Counterparts............................................... 49 10.15 Indemnity.................................................. 49
SIGNATURE PAGES S-1 EXHIBITS Form of: A Note B Notice of Borrowing C Notice of Conversion/Continuation D Officers' Certificate E Opinion of Assistant General Counsel of Company F-1 Fisher-Price Continuing Guaranty F-2 Mattel Sales Continuing Guaranty G-1 Fisher-Price Subordination Agreements G-2 Mattel Sales Subordination Agreements H Notice of Assignment and Acceptance SCHEDULES 1.01 Commitments and Pro Rata Shares 5.03 Material Subsidiaries of Company 5.11 Material Litigation 7.02 Certain Liens 10.06 Addresses for Notices and Lending Offices -iii- Mattel, Inc. 364-Day Facility MATTEL, INC. CREDIT AGREEMENT (364-DAY FACILITY) This CREDIT AGREEMENT (364-DAY FACILITY) (this "Agreement") is dated as of March 29, 2001 and is entered into by and among MATTEL, INC., a Delaware corporation (the "Company"), THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (individually referred to herein as a "Bank" and collectively as the "Banks"), Bank of America, N.A., as administrative agent for the Banks (in such capacity, the "Administrative Agent"), Citicorp USA, Inc., as syndication agent (in such capacity, the "Syndication Agent") and ABN AMRO Bank N.V., as documentation agent (in such capacity, the "Documentation Agent"). RECITAL The Company has requested that the Banks provide a revolving line of credit, and the Banks and the Administrative Agent are willing to do so on the terms and conditions set forth herein. In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: SECTION 1. DEFINITIONS. 1.01 Certain Defined Terms. The following terms used in this Agreement shall have the following meanings: "Administrative Agent" has the meaning assigned to that term in the -------------------- introduction to this Agreement. "Administrative Agent's Office" means Administrative Agent's address and, ----------------------------- as appropriate, account as set forth on Schedule 10.06 or such other address or -------------- account as Administrative Agent hereafter may designate by written notice to the Company and the Banks. "Administrative Agent-Related Persons" means Administrative Agent and any ------------------------------------ successor agent arising under Section 9.09, together with their respective ------------ Affiliates (including, in the case of Bank of America, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Affiliate", as applied to any Person, means any other Person directly or --------- indirectly controlling, controlled by or under common control with, that Person. For the purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. -1- "Agreement" means this Credit Agreement, as it may hereafter be amended, --------- supplemented, restated or otherwise modified from time to time. "Applicable Amount" means the commitment fee, utilization fee or the margin ----------------- applicable to Loans (expressed in basis points per annum) set forth in the chart below opposite the second highest rating issued by S&P, Moody's or Fitch on the Company's senior unsecured long-term debt:
Utilization Fee ------------------------------------ When outstanding Loans: Greater than or equal to 33% but Eurodollar less than or Greater than Rate Base Rate Senior Unsecured Long-Term Commitment equal to 66% of 66% of Loans Loans Debt Ratings Fee Commitments Commitments + + - ------------------------------------------------------------------------------------------------------------ A or higher by S&P A2 or higher by Moody's 10.0 12.5 25.0 32.0 00.0 A or higher by Fitch - ------------------------------------------------------------------------------------------------------------ A- by S&P A3 by Moody's 12.5 12.5 25.0 40.0 00.0 A- by Fitch - ------------------------------------------------------------------------------------------------------------ BBB+ by S&P Baa1 by Moody's 15.0 12.5 25.0 62.5 00.0 BBB+ by Fitch - ------------------------------------------------------------------------------------------------------------ BBB by S&P Baa2 by Moody's 17.5 12.5 25.0 75.0 00.0 BBB by Fitch - ------------------------------------------------------------------------------------------------------------ BBB- by S&P Baa3 by Moody's 22.5 12.5 25.0 112.5 25.0 BBB- by Fitch - ------------------------------------------------------------------------------------------------------------ None of above criteria satisfied 30.0 12.5 25.0 125.0 37.5 - ------------------------------------------------------------------------------------------------------------
Any change in the commitment fee, utilization fee or the margin applicable to Loans shall become effective upon any public announcement of any change in the above ratings that requires such a change according to the above chart. "Arranger" means Banc of America Securities LLC. -------- "Bank" has the meaning assigned to that term in the introduction to this ---- Agreement, together with any other financial institutions that become a party hereto as a "Bank" pursuant to Section 10.01. "Bank Affiliate" means a Person engaged primarily in the business of -------------- commercial banking and that is a Subsidiary of a Bank or of a Person of which a Bank is a Subsidiary. "Bank of America" means Bank of America, N.A.. --------------- -2- "Base Rate" means a fluctuating rate per annum which is the higher of (a) --------- the Federal Funds Rate plus one-half of one percent (1/2%) per annum and (b) the rate of interest publicly announced from time to time by Bank of America as its prime rate, as in effect on such date of determination. The prime rate is set by Bank of America based on various factors including Bank of America's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans. Bank of America may make loans at, above or below the rate announced by it as its prime rate. "Base Rate Loans" means Loans made by the Banks bearing interest at rates --------------- determined by reference to the Base Rate. "Business Day" means any day other than a Saturday, Sunday or other day on ------------ which commercial banks in New York City, New York, San Francisco, California or Dallas, Texas are authorized or required by law to close and, if the applicable Business Day relates to any Eurodollar Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Assets" means, as at any date of determination, those assets of a -------------- Person that would, in conformity with GAAP, be classified as property, plant or equipment on the balance sheet of that Person. "Capital Lease" as applied to any Person, means any lease of any property ------------- (whether real, personal or mixed) by that Person as lessee which would, in conformity with GAAP, be required to be accounted for as a capital lease on the balance sheet of that Person other than, in the case of the Company or any of its Subsidiaries, any such lease under which the Company or any of its Subsidiaries is the lessor. "Combined Purchasers' Investments" means an amount equal to the sum of (a) -------------------------------- the Purchasers' Investments under the Receivables Purchase Agreement plus (b) ---- the analogous amount under Other Permitted Accounts Receivable Financing Facilities relating to the sales of accounts receivable of Domestic Subsidiaries (without duplication for accounts receivable sold to a Subsidiary of the Company and then sold to a third party purchaser). "Commitment" means, for each Bank, the amount set forth under "Commitment" ---------- on Schedule 1.01, as such amount may be adjusted pursuant to Section 2.05. ------------- ------------ "Company Party" means the Company or any Person (except the Banks, the ------------- Administrative Agent, the Syndication Agent, the Documentation Agent and the Arranger and any of their respective Affiliates) from time to time party to a Loan Document. "Consolidated Funded Indebtedness" means, at any date of determination, for -------------------------------- the Company and its Subsidiaries on a consolidated basis, the sum of (a) all obligations and liabilities, whether current or long-term, for borrowed money, (b) that portion of obligations with respect to Capital Leases which is capitalized on the consolidated balance sheet of the Company and its Subsidiaries, and (c) all guaranties of unconsolidated funded obligations for borrowed money, all determined in conformity with GAAP. -3- "Consolidated Net Income" for any period, means the net income (or loss) of ----------------------- the Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP. "Consolidated Tangible Net Worth" means, as at any date of determination, ------------------------------- the net worth of the Company and its Subsidiaries on a consolidated basis minus ----- foreign exchange currency translation adjustments and intangible assets, all determined in conformity with GAAP. "Contingent Obligation", as applied to any Person, means, without --------------------- duplication, any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof or (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings. Contingent Obligations shall include, without limitation, (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another and (b) any liability of such Person for the obligations of another through any agreement (contingent or otherwise) (x) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (y) to maintain the solvency or any balance sheet item, level of income or financial condition of another, if in the case of any agreement described under subclauses (x) or (y) of this sentence the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. The amount of any Contingent Obligation denominated in a currency other than Dollars shall be equal to the Dollar Equivalent of such Contingent Obligation. "Contractual Obligation" as applied to any Person, means any provision of ---------------------- any security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "Default" means any event or circumstance which, with the giving of notice, ------- the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Documentation Agent" means ABN AMRO Bank N.V. in its capacity as ------------------- documentation agent. "Dollars" means lawful money of the United States of America. ------- "Domestic Subsidiary" means a Subsidiary of the Company that is ------------------- incorporated in a jurisdiction of the United States of America. -4- "Effective Date" means the date on which all the conditions in Section 4.01 -------------- ------------ are satisfied or waived. "Eligible Assignee" means (i) a commercial bank organized under the laws of ----------------- the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; and (iii) a Person that is primarily engaged in the business of commercial banking and that is (A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of which a Bank is a Subsidiary, or (C) a Person of which a Bank is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any -------------------- Governmental Person or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" means all federal, state or local laws, statutes, ------------------ common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Person, in each case relating to environmental, health, safety and land use matters. "ERISA" means, at any time, the Employee Retirement Income Security Act of ----- 1974, as amended from time to time and any successor statute, and the rules and regulations promulgated thereunder. "ERISA Affiliate", as applied to any Person, means any trade or business --------------- (whether or not incorporated) which is a member of a group of which that Person is a member and which is under common control within the meaning of Section 414(b) and 414(c) of the Internal Revenue Code. "Eurodollar Rate Loans" means Loans bearing interest at rates determined by --------------------- reference to the Eurodollar Rate as provided in Section 2.08(a). --------------- "Eurodollar Rate" means for any Interest Period with respect to any --------------- Eurodollar Rate Loan, a rate per annum determined by Administrative Agent pursuant to the following formula: Eurodollar Rate = Eurodollar Base Rate ------------------------------------------- 1.00 - Eurodollar Reserve Percentage -5- Where, "Eurodollar Base Rate" means, for such Interest Period: -------------------- (a) the rate per annum equal to the rate determined by Administrative Agent to be the offered rate that appears on the page of the Telerate screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by Administrative Agent as the rate of interest (rounded upward to the next 1/100th of 1%) at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by Administrative Agent (or its Affiliate) in its capacity as a Bank and with a term equivalent to such Interest Period would be offered by Bank of America's London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest ----------------------------- Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Bank, under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and the Eurodollar Base Rate by Administrative Agent shall be conclusive in the absence of manifest error. "Event of Default" means any of the events set forth in Section 8.01. ---------------- ------------ "Exchange Act" means, at any time, the Securities Exchange Act of 1934, as ------------ amended from time to time, and any successor statute, and the rules and regulations promulgated thereunder. -6- "Federal Funds Rate" means the weighted average of the rates on overnight ------------------ Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day of determination (or if such day of determination is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transaction received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve --------------------- System or any successor thereof. "Fisher-Price" means Fisher-Price, Inc., a Delaware corporation. ------------ "Fisher-Price Guaranty" means the Continuing Guaranty signed by Fisher- --------------------- Price substantially in the form of Exhibit F-1 hereto, as amended, supplemented, restated or otherwise modified from time to time. "Fisher-Price Subordination Agreement" means the Fisher-Price Subordination ------------------------------------ Agreement substantially in the form of Exhibit G-1 attached hereto signed by the Company and certain Affiliates of the Company with respect to which Fisher-Price has material outstanding obligations, as it may hereafter be amended, supplemented, restated or otherwise modified from time to time. "Fitch" means Fitch ICBA or any successor thereto. ----- "Funding Date" means the Business Day of the funding of a Loan. ------------ "GAAP" means generally accepted accounting principles set forth in the ---- opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Governmental Person" means the government of the United States or any ------------------- foreign government or the government of any state or locality therein, any political subdivision or any governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body or entity, or other regulatory bureau, authority, body or entity of the United States, any foreign government or any state or locality therein, including the Federal Deposit Insurance Company, the Comptroller of the Currency or the Federal Reserve Board. "Governmental Rule" means any law, statute, rule, regulation, ordinance, ----------------- order, judgment, guidelines or decision of any Governmental Person. "Indebtedness", as applied to any Person, means (i) all indebtedness for ------------ borrowed money, (ii) that portion of obligations with respect to Capital Leases which is required to be capitalized on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any -7- obligation owed for all or any part of the deferred purchase price of property or services which purchase price is (y) due more than twelve months from the date of incurrence of the obligation in respect thereof, or (z) evidenced by a promissory note and (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person. The amount of any Indebtedness shall be the principal amount of and all interest, premium, if any, and other fees and expenses accrued on any of the foregoing. "Interest Payment Date" means, with respect to any Eurodollar Rate Loan, --------------------- the last day of each Interest Period applicable to such Loan and, with respect to any Base Rate Loan, the last day of each calendar quarter, and with respect to all Loans, the Maturity Date; provided, however, that if any Interest Period -------- ------- for a Eurodollar Rate Loan exceeds three months, interest shall also be paid on the date which falls three months after the beginning of such Interest Period. "Interest Period" means, with respect to any Eurodollar Rate Loan, the --------------- period commencing on the Business Day the Eurodollar Rate Loan is disbursed or continued or on the date on which a Loan is converted into a Eurodollar Rate Loan and ending on the date one, two, three or six months thereafter, as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: -------- (i) if any Interest Period pertaining to a Eurodollar Rate Loan would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period pertaining to a Eurodollar Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period shall extend beyond the Maturity Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended --------------------- to the date hereof and from time to time hereafter, and the rules and regulations promulgated thereunder. "Lending Office" means, with respect to any Bank, the office or offices of -------------- the Bank specified as its "Lending Office" under its name on Schedule 10.06, or -------------- such other office or offices of the Bank as it may from time to time specify to the Company and the Administrative Agent in writing. "Lien" means any lien, mortgage, pledge, security interest, charge or ---- encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any kind of security interest). -8- "Loan Documents" means this Agreement, any Notes, the Mattel Sales -------------- Guaranty, the Fisher-Price Guaranty, the Mattel Sales Subordination Agreement, the Fisher-Price Subordination Agreement and all documents and instruments delivered in connection herewith or therewith; provided, however, that for the -------- ------- avoidance of doubt, "Loan Documents" shall not include documents included in the definition of "Loan Documents" under that certain Second Amended and Restated Credit Agreement dated as of March 11, 1998, as amended, among the Company, the banks from time to time party thereto and Bank of America as agent thereunder, except to the extent that any document or instrument delivered in connection therewith is also delivered in connection herewith. "Loans" has the meaning set forth in Section 2.01. ----- ------------ "Margin Stock" has the meaning assigned to the term "Margin Stock" in ------------ Regulation U of the Federal Reserve Board as in effect from time to time. "Material Adverse Effect" means (i) a material adverse effect upon the ----------------------- business, operations, properties, assets, business prospects or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, or (ii) a material impairment of the ability of the Company to perform the Obligations or of the Banks to enforce the Obligations. "Material Subsidiary" means Mattel Sales, Fisher-Price, or any other ------------------- Subsidiary of the Company which meets any of the following conditions: (a) the Company's and its Subsidiaries' investments in, and advances to, the Subsidiary exceed 10 percent of the total assets of the Company and its Subsidiaries consolidated as of the end of the most recently completed fiscal year (for a proposed business combination to be accounted for as a pooling of interest, this condition is also met when the number of common shares exchanged or to be exchanged by the Company exceeds 10 percent of its total common shares outstanding at the date the combination is initiated); or (b) the Company and its other Subsidiaries' proportionate share of the total assets (after intercompany eliminations) of the Subsidiary exceeds 10 percent of the total assets of the Company and its Subsidiaries consolidated as of the end of the most recently completed fiscal year; or (c) the Company and its other Subsidiaries' equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principles of the Subsidiary exceeds 10 percent of such income of the Company and its Subsidiaries consolidated for the most recently completed fiscal year. For purpose of meeting the prescribed income test the following guidance should be applied: (i) When a loss has been incurred by either the Company and its Subsidiaries consolidated or the tested Subsidiary, but not both, the equity in the income or loss of the -9- tested Subsidiary should be excluded from the income of the Company and its Subsidiaries consolidated for purposes of the computation. (ii) If income of the Company and its Subsidiaries consolidated for the most recent fiscal year is at least 10 percent lower than the average of the income for the last five years, such average income should be substituted for purposes of the computation. Any loss years should be omitted for purposes of computing average income. (iii) Where the test involves combined entities, as in the case of determining whether summarized financial data should be presented, entities reporting losses shall not be aggregated with entities reporting income. "Mattel Sales" means Mattel Sales Corp., a California corporation. ------------ "Mattel Sales Guaranty" means the Continuing Guaranty signed by Mattel --------------------- Sales substantially in the form of Exhibit F-2 hereto, as amended, supplemented, restated or otherwise modified from time to time. "Mattel Sales Subordination Agreement" means the Mattel Sales Subordination ------------------------------------ Agreement substantially in the form of Exhibit G-2 attached hereto signed by the Company and certain Affiliates of the Company with respect to which Mattel Sales has material outstanding obligations, as it may hereafter be amended, supplemented, restated or otherwise modified from time to time. "Maturity Date" means March 27, 2002. ------------- "Moody's" means Moody's Investors Service, Inc. or any successor thereto. ------- "Multiemployer Plan" means a "multiemployer plan" as defined in Section ------------------ 4001(a)(3) of ERISA which is maintained for employees of the Company or any ERISA Affiliate of the Company. "Note" means a promissory note of the Company payable to the order of a ---- Bank substantially in the form of Exhibit A hereto, evidencing the Loans made by such Bank to the Company. "Notice of Borrowing" means a notice substantially in the form of Exhibit B ------------------- hereto with respect to a proposed borrowing pursuant to Section 2.03(a). --------------- "Notice of Conversion/Continuation" means a notice given by the Company to --------------------------------- the Administrative Agent pursuant to Section 2.04, in substantially the form of ------------ Exhibit C hereto. "Obligations" means all obligations of every nature of the Company, Fisher- ----------- Price and Mattel Sales from time to time owed to the Administrative Agent, the Banks or any other Person required to be indemnified hereunder, or any of them, under any Loan Document. "Officers' Certificate" means a certificate substantially in the form of --------------------- Exhibit D hereto executed on behalf of the Company by two different officers of the Company, one of which shall -10- be (a) its Chairman of the Board (if an officer), one of its Presidents, one of its Executive Vice Presidents, or one of its Senior Vice Presidents, and the other one of which shall be (b) its Chief Financial Officer, its Treasurer, one of its Assistant Treasurers, or its Controller, delivered to the Banks by the Company pursuant to Section 6.01(c). --------------- "Other Permitted Accounts Receivable Financing Facility" means a financing ------------------------------------------------------ arrangement (other than the Receivables Purchase Agreement) entered into in the ordinary course of business under which accounts receivable of the Company, Mattel Sales, Fisher-Price or any other Subsidiary are periodically sold directly to third party purchasers, or sold to a Subsidiary of the Company formed for such purpose which in turn sells such accounts receivable to third party purchasers; provided, however, that in connection with any such financing -------- ------- arrangement: (a) there is no recourse to any seller of such accounts receivable on account of the creditworthiness of the obligor on such accounts receivable; and (b) no negative pledge or Lien is created on any accounts receivables not actually sold or discounted. "Participant" has the meaning set forth in Section 10.01. ----------- ------------- "Pension Plan" means any employee plan which is subject to Section 412 of ------------ the Internal Revenue Code and which is maintained for employees of the Company or any ERISA Affiliate of the Company other than a Multiemployer Plan. "Person" means any individual, partnership, corporation (including a ------ business trust), joint stock company, joint venture, trust, bank, trust company, unincorporated association or other entity or a government or any agency or political subdivision thereof. "Pro Rata Share" means with respect to each Bank the percentage set forth -------------- opposite such Bank's name on Schedule 1.01. ------------- "Purchasers' Investment" has the meaning set forth in the Receivables ---------------------- Purchase Agreement. "Receivables Purchase Agreement" means the Receivables Purchase Agreement ------------------------------ dated as of March 11, 1998, as amended, among Mattel Factoring, Inc., as transferor, the Company, as guarantor and servicer, the purchasers party thereto and the Receivables Purchase Administrative Agent, as it may be amended, supplemented, restated or otherwise modified from time to time. "Regulation D" means Regulation D of the Federal Reserve Board as in effect ------------ from time to time. "Requisite Banks" means, as at any date of determination, Banks having at --------------- least 51% of the then aggregate unpaid principal amount of the Loans (or if no Loans are then outstanding, Banks having at least 51% of the combined Commitments). -11- "Responsible Officer" means the Chief Executive Officer, the Chief ------------------- Financial Officer, the Treasurer or an Assistant Treasurer of the Company or any officer of the Company designated by any of the above. Any document or certificate hereunder that is signed by a Responsible Officer shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of the Company and such Responsible Officer shall be conclusively presumed to have acted on behalf of the Company. "Securities Act" means, at any time, the Securities Act of 1933, as amended -------------- from time to time, and any successor statute, and the rules and regulations promulgated thereunder. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw- --- Hill Companies, Inc., or any successor thereto. "Subsidiary" means any corporation, association or other business entity of ---------- which more than 50% of the total voting power of shares of stock entitled to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof. "Syndication Agent" means Citicorp USA, Inc. in its capacity as syndication ----------------- agent. 1.02 Other Definitional Provisions. References to "Sections" shall be to Sections of this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1.01 may, ------------ unless the context otherwise requires, be used in the singular or the plural depending on the reference. SECTION 2. THE COMMITMENTS. 2.01 The Commitments. Each Bank hereby severally agrees to make advances to the Company ("Loans") until the Maturity Date on the terms and conditions set forth in this Agreement in an aggregate principal amount not exceeding such Bank's Commitment; provided, however, that the outstanding principal amount of -------- ------- ------ all Loans hereunder shall not exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay pursuant to Section 2.06 and reborrow pursuant to this Section 2.01. ------------ 2.02 Loan Accounts and Notes. (a) Subject to Section 2.02(b), the Loans made by each Bank shall be --------------- evidenced by one or more loan accounts maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Administrative Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company and the interest and payments thereon. Any failure to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. -12- (b) Upon the written request of any Bank made through the Administrative Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s), the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse the schedules annexed to its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an -------- ------- error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.03 Borrowing Procedure. (a) Whenever the Company desires to borrow hereunder, it shall deliver irrevocable telephonic notice to the Administrative Agent followed immediately by written notice in the form of a Notice of Borrowing, which telephonic notice must be received by the Administrative Agent no later than (i) 8:00 a.m. (California time) on the proposed Funding Date in the case of Base Rate Loans and (ii) 9:00 a.m. (California time) three Business Days in advance of the proposed Funding Date in the case of Eurodollar Rate Loans, specifying (A) the proposed Funding Date which shall be a Business Day, (B) the amount of the proposed borrowing, (C) whether the proposed borrowing shall consist of Base Rate Loans or Eurodollar Rate Loans, and (D) in the case of Eurodollar Rate Loans, the requested Interest Period. Base Rate Loans made on any Funding Date shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess of that amount. Eurodollar Rate Loans made on any Funding Date shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $500,000 in excess of that amount. (b) Promptly (and normally within two hours) after receipt of a Notice of Borrowing (or telephone notice in lieu thereof), the Administrative Agent shall notify each Bank of the proposed borrowing. Each Bank shall make available to the Administrative Agent its Pro Rata Share of the amount (if any) by which the principal amount of the proposed borrowing exceeds the principal amount of the Loans (if any) maturing on the Funding Date, in same day funds, by remitting such funds to Administrative Agent's Office no later than 11:00 a.m. (California time) on the Funding Date. Upon satisfaction of the conditions set forth in Section 4.02, the Administrative Agent shall make available to the Company on - ------------ such Funding Date the aggregate of the amounts (if any) so made available by the Banks by causing an amount of same day funds equal to such aggregate amount (if any) received by the Administrative Agent to be credited to the account of the Company at such office of Bank of America. To the extent that Eurodollar Rate Loans made by the Banks mature on any Funding Date, the Banks shall apply the proceeds of the Loans made on such Funding Date, to the extent thereof, to the repayment of such maturing Loans, such Loans and repayments intended to be a contemporaneous exchange. 2.04 Conversion and Continuation Elections. (a) The Company may upon irrevocable written notice to the Administrative Agent: (i) elect to convert any Base Rate Loans (or any part thereof in an amount not less than $5,000,000 or an integral multiple of $500,000 in excess thereof) on any Business Day into Eurodollar Rate Loans; (ii) elect to convert any Eurodollar Rate Loans (or any part thereof) on -13- the last day of any Interest Period therefor into Base Rate Loans in an amount not less than $1,000,000 or an integral multiple of $500,000 in excess thereof; or (iii) elect to continue any Eurodollar Rate Loans (or any part thereof in an amount not less than $5,000,000 or an integral multiple of $500,000 in excess thereof) on the last day of any Interest Period therefor; provided, that if the -------- aggregate amount of Eurodollar Rate Loans shall have been reduced, by payment, prepayment, or conversion of part thereof to be less than $5,000,000, the Eurodollar Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as Eurodollar Rate Loans shall terminate. (b) Each conversion or continuation shall be made upon irrevocable telephonic notice to the Administrative Agent followed immediately by written notice in the form of a Notice of Conversion/ Continuation, which telephonic notice must be received by the Administrative Agent prior to (i) 9:00 a.m. (California time) at least three Business Days in advance of the conversion or continuation date, if the Loans are to be converted into or continued as Eurodollar Rate Loans and (ii) 9:00 a.m. (California time) on the conversion or continuation date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed conversion or continuation date; (B) the aggregate amount of Loans to be converted or continued; (C) the nature of the proposed conversion or continuation; and (D) the duration of the requested Interest Period, if applicable. (c) If upon the expiration of any Interest Period applicable to Eurodollar Rate Loans, the Company has failed to select a new Interest Period to be applicable to such Eurodollar Rate Loans or type of Loan or if any Default or Event of Default shall then exist, the Company shall be deemed to have elected to convert such Eurodollar Rate Loans into Base Rate Loans effective as of the expiration date of such current Interest Period. (d) Upon receipt of a Notice of Conversion/Continuation, the Administrative Agent will promptly notify each Bank thereof, or, if no timely notice is provided, the Administrative Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made pro rata according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Requisite Banks shall otherwise agree, after the occurrence of and during the continuance of a Default or Event of Default, the Company may not elect to have a Loan be made as, or converted into or continued as, a Eurodollar Rate Loan. (f) Notwithstanding any other provision contained in this Agreement, after giving effect to any conversion or continuation of any Loans, there shall not be more than five different Interest Periods in effect. 2.05 Reduction and Termination of Commitments. The Company may from time to time, upon not less than three Business Days' prior written notice written or telephonic notice confirmed in writing to the Administrative Agent, reduce or terminate the combined Commitments. The Administrative Agent shall promptly notify the Banks of such request. Any partial reduction of the Commitments shall be in an aggregate minimum amount of $10,000,000 and integral multiples of $1,000,000 in excess of that amount. Any reduction of the combined Commitments shall be applied to each Bank in accordance with such Bank's Pro Rata Share -14- thereof. All accrued commitment fees to, but not including the effective date of any reduction or termination of the Commitments, shall be paid on the effective date of such reduction or termination. No reduction or termination of the Commitments shall be permitted if, after giving effect thereto and to any prepayments made on the effective date thereof, the outstanding principal amount of the Loans would exceed the combined Commitments as so reduced. Any reduction or termination of the Commitments shall be permanent. 2.06 Voluntary Prepayments. The Company may, upon not less than one Business Days' prior written or telephonic notice confirmed in writing to the Administrative Agent (in the case of a prepayment of a Base Rate Loan) or three Business Days' prior written or telephonic notice confirmed in writing to the Administrative Agent (in the case of a prepayment of a Eurodollar Rate Loan) (which notice the Administrative Agent will promptly transmit by telecopy, telex or telephone to each Bank), at any time and from time to time prepay (i) any Eurodollar Rate Loans in whole or in part in an aggregate minimum amount of $3,000,000 and integral multiples of $500,000 in excess of that amount so long as the unpaid balance is not less than $5,000,000; or (ii) any Base Rate Loans in whole or in part in an aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in excess of that amount; provided that in the event of -------- any such prepayment of any Eurodollar Rate Loans, the Company shall be obligated to reimburse the Banks in respect thereof pursuant to Section 3.05. If such ------------ notice of prepayment does not specify how such prepayment shall be applied, it shall be applied first to Base Rate Loans to the full extent thereof before application to Eurodollar Rate Loans, as determined by the Administrative Agent. All prepayments of Eurodollar Rate Loans shall be applied to the payment of any interest that has accrued to the date of such prepayment before application to principal. Prepayments of Base Rate Loans shall be applied to principal only. 2.07 Repayment of Loans. Each Loan shall mature and the Company shall repay the unpaid principal amount of each Loan on the Maturity Date. 2.08 Interest on the Loans. (a) Subject to Section 2.08(c), the Loans shall bear interest on the unpaid --------------- principal amount thereof from the Funding Date through maturity (whether by acceleration or otherwise) at a rate per annum equal to (i) with respect to Eurodollar Rate Loans, the Eurodollar Rate plus the Applicable Amount for ---- Eurodollar Rate Loans or (ii) with respect to Base Rate Loans, the Base Rate plus the Applicable Amount for Base Rate Loans. - ---- (b) Subject to Section 2.08(c), from and after the Effective Date, interest --------------- shall be payable in arrears on the Loans on each Interest Payment Date applicable to that Loan. Interest paid on the date of any partial prepayment of Loans hereunder shall be paid in respect of the portion of the Loans so prepaid. (c) Any principal payments on the Loans not paid when due and, to the extent permitted by applicable law, any interest payments on the Loans not paid when due, in each case whether at stated maturity, by notice of prepayment, by acceleration or otherwise, shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the rate of interest otherwise payable under this Agreement. -15- 2.09 Fees. (a) The Company agrees to pay a commitment fee equal to the Applicable Amount for the commitment fee on the daily average unused portion of the Commitment from the date of this Agreement until the Maturity Date. The Company shall pay the commitment fee to the Administrative Agent for distribution to each Bank in accordance with its Pro Rata Share. The commitment fee shall be calculated on the basis of a 360-day year and the actual number of days elapsed and shall be payable quarterly in arrears on the last Business Day of each calendar quarter, for all amounts accrued to such date, and on the Maturity Date; provided that, in connection with any reduction or termination of the -------- Commitment pursuant to Section 2.05, the accrued fee calculated on the portion ------------ so terminated or reduced for the period ending on such date shall also be paid on the date of such reduction or termination. (b) The Company agrees to pay a utilization fee equal to the Applicable Amount therefor on the daily average principal amount of all outstanding Loans on each day that the aggregate principal amount of outstanding Loans exceeds 33% of the combined Commitments. The Company shall pay the utilization fee to the Administrative Agent for distribution to each Bank in accordance with its Pro Rata Share. The utilization fee shall be calculated on the basis of a 360-day year and the actual number of days elapsed and shall be payable quarterly in arrears on the last Business Day of each calendar quarter, for all amounts accrued to such date, and on the Maturity Date; provided that, in connection -------- with any reduction or termination of the Commitment pursuant to Section 2.05, ------------ the accrued fee calculated on the portion so terminated or reduced for the period ending on such date shall also be paid on the date of such reduction or termination. (c) The Company shall pay to the Administrative Agent for the account of each Bank an upfront fee as agreed upon between the Company and the Arranger. (d) The Company shall pay to the Administrative Agent for the account of itself and the Arranger a structuring and arrangement fee as agreed upon between the Company, the Administrative Agent and the Arranger. (e) The Company shall pay to the Administrative Agent for its own account an annual administrative fee as agreed upon between the Company and the Administrative Agent. 2.10 Calculation of Interest and Fees. (a) Interest on all Loans and fees payable under this Agreement shall be computed on the basis of a 360-day year and the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of the Loan or the first day of an Interest Period, as the case may be, shall be included and the date of payment shall be excluded; provided -------- that, if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. (b) Any change in the interest rate on a Loan resulting from a change in the Applicable Amount or Eurodollar Reserve Percentage shall become effective as of the opening of business on the day on which such change in the Applicable Amount or Eurodollar Reserve Percentage becomes effective. Each determination of an interest rate by the Administrative -16- Agent pursuant hereto shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.11 Payments by the Company. (a) All payments of principal, interest and fees hereunder and under any Notes shall be made without setoff, counterclaim, recoupment or any other deduction, in same day funds and delivered to the Administrative Agent at the Administrative Agent's Office for the account of the Banks or the Administrative Agent not later than 11:00 a.m. (California time) on the date due. The Administrative Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such principal, interest, fees or other amounts in like funds received. Any payment which is received by the Administrative Agent after that time shall be deemed to have been paid by the Company on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions in the definition of "Interest Period", whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Administrative Agent shall have received notice from the Company prior to the date on which any payment is due to the Banks hereunder that the Company will not make such payment in full as and when required hereunder, the Administrative Agent may assume that the Company has made such payment in full to the Administrative Agent on such date in immediately available funds and the Administrative Agent may (but shall not be so required), in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company shall not have made such payment in full to the Administrative Agent, each Bank shall repay to the Administrative Agent on demand such amount distributed to such Bank, together with interest thereon for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate as in effect for each such day. 2.12 Payments by the Banks to the Administrative Agent. (a) Unless the Administrative Agent shall have received notice from a Bank on the Effective Date or, with respect to each borrowing after the Effective Date, by 12:00 noon (California time) one Business Day prior to the date of any proposed borrowing of Eurodollar Rate Loans, or by 10:00 a.m. (California time) on the date of any proposed borrowing of Base Rate Loans, that such Bank will not make available to the Administrative Agent as and when required hereunder for the account of the Company the amount of that Bank's Pro Rata Share of the borrowing, the Administrative Agent may assume that each Bank has made such amount available to the Administrative Agent in immediately available funds on the Funding Date and the Administrative Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Administrative Agent in immediately available funds and the Administrative Agent in such circumstances has made available to the -17- Company such amount, that Bank shall on the next Business Day following the date of such borrowing make such amount available to the Administrative Agent, together with interest at the Federal Funds Rate for and determined as of each day during such period. A notice of the Administrative Agent submitted to any Bank with respect to amounts owing under this Section 2.12(a) shall be -------------- conclusive, absent manifest error. If such amount is so made available, such payment to the Administrative Agent shall constitute such Bank's Loan on the date of borrowing for all purposes of this Agreement. If such amount is not made available to the Administrative Agent on the next Business Day following the date of such borrowing, the Administrative Agent shall notify the Company of such failure to fund and, upon demand by the Administrative Agent, the Company shall pay such amount to the Administrative Agent for the Administrative Agent's account, together with interest thereon for each day elapsed since the date of such borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such borrowing. (b) The failure of any Bank to make any Loan on any date of borrowing shall not relieve any other Bank of any obligation hereunder to make a Loan on the date of such borrowing, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on the date of any borrowing. 2.13 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share of payments on account of the Loans obtained by all the Banks, such Bank shall forthwith (a) notify the Administrative Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, -------- however, that if all or any portion of such excess payment is thereafter - ------- recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's Pro Rata Share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.13 may, ------------ to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Administrative Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased pursuant to this Section 2.13 and will in each case notify the Banks ------------ following any such purchases or repayments. SECTION 3. PAYMENTS IN GENERAL. 3.01 Taxes. -18- (a) Subject to Section 3.01(d) and Section 3.01(g), any and all payments by --------------- --------------- the Company to each Bank or the Administrative Agent under this Agreement shall be made free and clear of, and without deduction or withholding for, any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Administrative Agent, such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Bank's or the Administrative Agent's net income by the jurisdiction under the laws of which such Bank or the Administrative Agent, as the case may be, is organized or maintains a Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). (b) In addition, the Company shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents (hereinafter referred to as "Other Taxes"). (c) Subject to Section 3.01(g), the Company shall indemnify and hold --------------- harmless each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.01) paid by such Bank ------------ or the Administrative Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto. Payment under this indemnification shall be made within 30 days from the date such Bank or the Administrative Agent makes written demand therefor. (d) If the Company shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank or the Administrative Agent, then, subject to Section 3.01(g): (i) the sum payable --------------- shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section ------- 3.01) such Bank or the Administrative Agent, as the case may be, receives an - ---- amount equal to the sum it would have received had no such deductions been made; (ii) the Company shall make such deductions, and (iii) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (e) Within 30 days after the date of any payment by the Company of Taxes or Other Taxes, the Company shall furnish to the Administrative Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Administrative Agent. (f) Each Bank that is a "foreign corporation, partnership or trust" within the meaning of the Internal Revenue Code shall deliver to the Administrative Agent, prior to receipt of any payment subject to withholding under the Internal Revenue Code (or after accepting an assignment of an interest herein), two duly signed completed copies of either IRS Form W-8BEN or any successor thereto (relating to such Bank and entitling it to an exemption from, or reduction of, withholding tax on all payments to be made to such Bank by the Company pursuant to this Agreement) or IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Bank by the Company pursuant to this Agreement) or such other evidence satisfactory to the Company and the Administrative Agent that such Bank is entitled to an -19- exemption from U.S. withholding tax. Thereafter and from time to time, each such Bank shall (i) promptly submit to the Administrative Agent such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States laws and regulations to avoid, or such evidence as is satisfactory to the Company and the Administrative Agent of any available exemption from or reduction of, United States withholding taxes in respect of all payments to be made to such Bank by the Company pursuant to this Agreement, (ii) promptly notify the Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction, and (iii) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Bank, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any requirement of applicable laws that the Company make any deduction or withholding for taxes from amounts payable to such Bank. If such Bank fails to deliver the above forms or other documentation, then the Administrative Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Internal Revenue Code, without reduction. If any Governmental Person asserts that the Administrative Agent did not properly withhold any tax or other amount from payments made in respect of such Bank, such Bank shall indemnify the Administrative Agent therefor, including all penalties and interest, any taxes imposed by any jurisdiction on the amounts payable to the Administrative Agent under this Section, and costs and expenses (including costs and expenses of attorneys to the Administrative Agent) of the Administrative Agent. The obligation of the Banks under this Section shall survive the payment of all Obligations and the resignation or replacement of the Administrative Agent. (g) The Company will not be required to pay any additional amounts in respect of Taxes pursuant to Section 3.01(d) to any Bank for the account of any --------------- Lending Office of such Bank: (i) if the obligation to pay such additional amounts would not have arisen but for a failure by such Bank to comply with its obligations under Section 3.01(f) in respect of such Lending Office; or (ii) if --------------- such Bank shall have delivered to the Company the form(s) in respect of such Lending Office pursuant to Section 3.01(f), and such Bank shall not be entitled --------------- to exemption from deduction or withholding of United States Federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or in the official interpretation of such law or regulations by any Governmental Person charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such form(s) (h) If, at any time, the Company requests any Bank to deliver any forms or other documentation pursuant to Section 3.01(f), then the Company shall, on --------------- demand of such Bank through the Administrative Agent, reimburse such Bank for any costs and expenses (including expenses of outside legal counsel and the allocated costs of in-house counsel) reasonably incurred by such Bank in the preparation or delivery of such forms or other documentation. (i) If the Company is required to pay additional amounts to any Bank or the Administrative Agent pursuant to Section 3.01(d), then such Bank shall use its --------------- reasonable best efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter -20- accrue if such change in the judgment of such Bank is not otherwise disadvantageous to such Bank. (j) The agreements and obligations of the Company contained in this Section ------- 3.01 shall survive the payment in full of all other Obligations. - ---- 3.02 Capital Adequacy. If (a) any adoption of or any change in or in the interpretation of any law, rule or regulation, or (b) compliance with any guideline, request or directive of any central bank or other Governmental Person or quasi-governmental authority exercising control over banks or financial institutions generally or any court (whether or not having the force of law), or (c) any change in the force or effectiveness of the regulations set forth at 12 C.F.R. Part 3 (Appendix A), 12 C.F.R. Part 225 (Appendix A), 12 C.F.R. Part 208 (Appendix A) or 12 C.F.R. Part 325 (Appendix A) requires that the commitments of any Bank hereunder (including, without limitation, commitments and obligations in respect of Loans) be treated as an asset or otherwise be included for purposes of calculating the appropriate amount of capital to be maintained by such Bank or any corporation controlling such Bank (a "Change in Law"), the result of which is to reduce the rate of return on such Bank's capital as a consequence of such commitments to a level below that which such Bank could have achieved but for such Change in Law, taking into consideration such Bank's policies with respect to capital adequacy, by an amount which such Bank deems to be material, the Bank shall deliver to the Company a statement of the amount necessary to compensate such Bank for the reduction in the rate of return on its capital attributable to such commitments (the "Capital Compensation Amount"). The Bank shall determine the Capital Compensation Amount in good faith, using reasonable attribution and averaging methods. The Bank shall from time to time notify the Company of the amount so determined. Such amount shall be due and payable by the Company to such Bank ten Business Days after such notice is given. As soon as practicable after any Change in Law, each Bank shall submit to the Company estimates of the Capital Compensation Amounts that would be payable as a function of such Bank's commitments hereunder. 3.03 Illegality. (a) If any Bank shall determine that any Governmental Rule or any change therein or in the interpretation or administration thereof has made it unlawful, or that any Governmental Person has asserted that it is unlawful, for any Bank or its Lending Office to make Eurodollar Rate Loans, then, on notice thereof by the Bank to the Company through the Administrative Agent, the obligation of the Bank to make Eurodollar Rate Loans shall be suspended until the Bank shall have notified the Administrative Agent and the Company that the circumstances giving rise to such determination no longer exists. (b) If a Bank shall determine that any Governmental Rule or any change therein or in the interpretation or administration thereof has made it unlawful, or that any Governmental Person has asserted that it is unlawful, for any Bank or its Lending Office to maintain any Eurodollar Rate Loan, the Company shall prepay all Eurodollar Rate Loans of the Bank then outstanding, together with interest accrued thereon, or convert all Eurodollar Rate Loans of the Bank then outstanding to Base Rate Loans pursuant to Section 2.04, either on the last day ------------ of the Interest Period thereof if the Bank may lawfully continue to maintain such Eurodollar Rate Loans to such day, or promptly, if the Bank may not lawfully continue to maintain such -21- Eurodollar Rate Loans, together with any amounts required to be paid in connection therewith pursuant to Section 3.05. ------------ (c) If the obligation of any Bank to make or maintain Eurodollar Rate Loans has been terminated, the Company may elect, by giving notice to the Bank through the Administrative Agent that all Loans which would otherwise be made by the Bank as Eurodollar Rate Loans shall be instead Base Rate Loans. (d) Before giving any notice to the Administrative Agent pursuant to this Section 3.03, the affected Bank shall designate a different Lending Office with - ------------ respect to its Eurodollar Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. 3.04 Increased Costs and Reduction of Return. If any Bank shall determine that, due to either (a) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Eurodollar Rate) in or in the interpretation of any law or regulation or (b) the compliance with any guideline or request from any Governmental Person (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Eurodollar Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand therefor by such Bank (with a copy of such demand to the Administrative Agent), pay to such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. Each Bank agrees to notify the Company of the occurrence of such an increased cost event promptly after obtaining knowledge thereof. 3.05 Funding Losses. The Company agrees to reimburse each Bank and to hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make any payment or prepayment of principal of any Eurodollar Rate Loan (including payments made after any acceleration thereof); (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/ Continuation; (c) the failure of the Company to make any prepayment after the Company has given a notice in accordance with Section 2.06; or (d) the prepayment of a Eurodollar Rate Loan ------------ for any reason on a day which is not the last day of the Interest Period with respect thereto; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Eurodollar Rate Loans hereunder or from fees payable to terminate the deposits from which such funds were obtained. Solely for purposes of calculating amounts payable by the Company to the Banks under this Section 3.03(b) and Sections 3.04 and 3.05, each --------------- ------------- ---- Eurodollar Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the Eurodollar Rate used in determining the Eurodollar Rate for such Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan is in fact so funded. This covenant shall survive the payment in full of all other Obligations. -22- 3.06 Inability to Determine Rates. If Administrative Agent shall have determined that for any reason adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or if the Requisite Banks advise the Administrative Agent in writing that the Eurodollar Rate applicable for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to such Banks of funding such Loan, the Administrative Agent will forthwith give notice of such determination to the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Eurodollar Rate Loans hereunder shall be suspended until the Administrative Agent upon the instruction of the Requisite Banks revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/ Continuation then submitted by it. If the Company does not revoke such notice with respect to Loans, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Rate Loans. 3.07 Survival. The agreements and obligations of the Company in this Section 3 shall survive the payment of all other Obligations. - --------- SECTION 4. CONDITIONS PRECEDENT. 4.01 Conditions to Effectiveness. The effectiveness of the Agreement is subject to satisfaction of the following conditions precedent: (a) The Company shall deliver to the Administrative Agent and Banks (or to the Administrative Agent for the Banks with sufficient originally executed copies for each Bank, except for any Notes): (i) This Agreement, duly executed and delivered by the Company, the Administrative Agent and all Banks; (ii) A Note, duly executed and delivered by the Company, drawn to the order of each Bank requesting a Note, with appropriate insertions; (iii) The Mattel Sales Guaranty and the Fisher-Price Guaranty, duly executed and delivered by Mattel Sales and Fisher-Price, respectively; (iv) The Mattel Sales Subordination Agreement and the Fisher-Price Subordination Agreement duly executed and delivered by the Company and each Affiliate of the Company to whom Mattel Sales or Fisher-Price owes any material outstanding obligations; (v) Copies of the resolutions of the board of directors or the executive committee of each Company Party approving and authorizing the execution, delivery and performance by such Company Party of each Loan Document to which it is a party, -23- certified as of the Effective Date by the secretary or an assistant secretary of such Company Party; (vi) A certificate of the secretary or assistant secretary of each Company Party, certifying the names and true signatures of the officers of such Company Party authorized to execute and deliver the Loan Documents to which it is a party; (vii) The articles or certificate of incorporation or organization of each Company Party as in effect on the Effective Date, certified by the secretary of state of the state of its incorporation or formation as of a recent date and the bylaws or operating agreement of each Company Party as in effect on the Effective Date, certified by the secretary or assistant secretary of such Company Party as of the Effective Date; (viii) A good standing certificate for each Company Party from the secretary of state of its state of incorporation or formation dated as of a recent date; (ix) Executed copies of one or more favorable written opinions of Christopher O'Brien, Esq., Assistant General Counsel of the Company, dated as of the Effective Date, substantially in the form of Exhibit E hereto relating to the Company Parties and as to such other matters as the Administrative Agent and the Banks may reasonably request; and (x) A certificate signed by one of the officers authorized to deliver an Officers' Certificate certifying (A) that the conditions specified in Sections 4.01(d) and (e) have been satisfied, (B) that there has been no ---------------- --- event or circumstance since the date of the audited financial statements dated December 31, 2000 referred to in Section 5.08 which has a Material ------------ Adverse Effect; and (C) the current ratings on the Company's long-term unsecured Indebtedness by S&P, Moody's and Fitch. (b) The Company shall have paid all fees payable pursuant to Sections -------- 2.09(b), (c), (d) and (e). - ------- --- --- --- (c) The Company shall have performed in all material respects all agreements which this Agreement provides shall be performed by it on or before the Effective Date. (d) The representations and warranties of each Company Party contained in any Loan Document shall be true, correct and complete in all material respects on and as of the Effective Date. (e) No Default or Event of Default shall exist. 4.02 Conditions to All Loans. The obligation of each Bank to make any Loan is subject to the following further conditions precedent that, as of the applicable Funding Date: (a) The Administrative Agent shall have received on or before that Funding Date a Notice of Borrowing signed by a Responsible Officer on behalf of the Company in writing delivered to the Administrative Agent; -24- (b) The representations and warranties of the Company contained in any Loan Document (except the representation and warranty contained in Section 5.09 and, ------------ in the case of a borrowing of Loans where the aggregate principal amount of the Loans being made on that Funding Date equals or is less than the aggregate principal amount of Loans maturing on that Funding Date, the representation and warranty contained in Section 5.11), shall be true, correct and complete in all ------------ material respects on and as of that Funding Date (except to the extent that such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date), to the same extent as though made on and as of that Funding Date; and (c) No Default or Event of Default shall exist or shall result from such borrowing or continuation or conversion. Each Notice of Borrowing submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the Funding Date, that the conditions in Section 4.02 are satisfied or waived. ------------ SECTION 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Banks and the Administrative Agent to enter into this Agreement and to make any extension of credit hereunder, the Company represents and warrants to each Bank and the Administrative Agent that the following statements are true, correct and complete: 5.01 Organization and Powers. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; and, except for changes in the ordinary course of business or as permitted or contemplated by this Agreement, each of the Material Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; and each has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted and, in the case of the Company, to enter into this Agreement, a Fisher-Price Subordination Agreement and a Mattel Sales Subordination Agreement, to issue the Notes and to carry out the transactions contemplated hereby and thereby. 5.02 Good Standing. The Company and, except for changes in the ordinary course of business or as permitted or contemplated by this Agreement, each Material Subsidiary is in good standing wherever necessary to carry on its present business and operations, except in jurisdictions in which the failure to be in good standing has or will have no Material Adverse Effect. 5.03 Material Subsidiaries. Except for changes in the ordinary course of business or as permitted or contemplated by this Agreement, Schedule 5.03 ------------- correctly sets forth the name, jurisdiction of incorporation and ownership interest of the Company in each of its Material Subsidiaries as of the date hereof. 5.04 Authorization of Borrowing. The execution, delivery and performance of each Loan Document to which it is a party, and acknowledgement of the Fisher- Price Subordination -25- Agreement and the Mattel Sales Subordination Agreement and the issuance, delivery and payment of the Notes have been duly authorized by all necessary corporate action by the Company. 5.05 No Conflict. The execution, delivery and performance by the Company of this Agreement and the acknowledgement of the Fisher-Price Subordination Agreement, the Mattel Sales Subordination Agreement and the issuance, delivery and payment of the Notes do not and will not (a) violate the Restated Certificate of Incorporation or Bylaws of the Company, (b) violate any provision of law applicable to the Company, or any material order, judgment or decree of any court or other agency of government binding on the Company, the violation of which would result in a Material Adverse Effect, (c) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of the Company, (d) result in or require the creation or imposition of any material lien, security interest, charge or encumbrance of any nature whatsoever upon any of its material properties or assets, or (e) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of the Company. 5.06 Governmental Consents. The execution, delivery and performance by the Company of each Loan Document to which it is a party and each agreement, document, or instrument required hereunder, the acknowledgment of the Fisher- Price Subordination Agreement, Mattel Sales Subordination Agreement, and the issuance, delivery and payment of the Notes do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any Federal, state or other governmental authority or regulatory body or other such person. 5.07 Binding Obligation. This Agreement is, and each other Loan Document to which it is a party, when executed and delivered hereunder will be, the legally valid and binding obligations of the Company, enforceable against it in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally. 5.08 Financial Condition. The Company has heretofore delivered to the Banks a consolidated balance sheet of the Company and its Subsidiaries for the fiscal year ended December 31, 2000 and related consolidated statements of income, shareholders' equity and changes in financial position of the Company and its Subsidiaries for such fiscal year, audited by Price Waterhouse. All such statements were prepared in accordance with GAAP and fairly present the consolidated financial position of the Company and its Subsidiaries as at the date thereof and the consolidated results of operations and statement of cash flow of the Company and its Subsidiaries for the period then ended. Neither the Company nor any of its Subsidiaries has any material Contingent Obligation, liability for taxes or long-term lease which as of the date of this Agreement, individually or in the aggregate, would, if it became absolute, result in a Material Adverse Effect which is not reflected in the foregoing statements or in the notes thereto. 5.09 Changes, Etc. Since December 31, 2000, there has been no event or events that have, either individually or in the aggregate, resulted in a Material Adverse Effect. -26- 5.10 Title to Properties. The Company and its Subsidiaries have good, sufficient and legal title to all the properties and assets reflected in the consolidated balance sheet referred to in Section 5.08 except as set forth in ------------ said balance sheet or in the notes thereto, except for assets acquired or disposed of in the ordinary course of business or as otherwise permitted by this Agreement since December 31, 2000 and except for immaterial defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. 5.11 Litigation; Adverse Facts. Except as set forth on Schedule 5.11, there ------------- is no action, suit, proceeding or arbitration (whether or not purportedly on behalf of the Company or any of its Subsidiaries) at law or in equity or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of the Company's or such Subsidiaries' properties which, in the reasonable judgment of the Company and its executive officers (assuming adverse determination of facts which the Company in good faith believes it would not successfully prove, and considering damages which in their best judgment is the maximum that would be awarded upon, and the likelihood of, an adverse determination of the claim or the amount which reflects their best judgment as to that required to be paid to settle the claims) would result in a Material Adverse Effect and there is no basis known to such executive officers for any such action, suit or proceeding. Neither the Company nor any of its Subsidiaries is (i) in violation of any applicable law which could result in a Material Adverse Effect, or (ii) subject to or in default with respect to any final judgment, writ, injunction, decree, rule or regulation of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which could result in a Material Adverse Effect. There is no action, suit, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries which provides a reasonable basis for questioning the validity or the enforceability of any Loan Document. 5.12 Payment of Taxes. All tax returns and reports of the Company and its Material Subsidiaries required to be filed by any of them have been timely filed, and all taxes, assessments, fees and other governmental charges upon the Company and its Subsidiaries and upon their respective properties, assets, income and franchises which are due and payable have been paid when due and payable or bonded against, except to the extent permitted by Section 6.03. The ------------ Company knows of no proposed tax assessment against it or any of its Subsidiaries that would result in a Material Adverse Effect. 5.13 Agreements. Neither the Company nor any of its Subsidiaries is a party to or is subject to any material agreement or instrument or charter or other internal restriction which results in a Material Adverse Effect. 5.14 Performance. Neither the Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Contractual Obligation of the Company, and no condition exists which, with the giving of notice or the lapse of time or both, would constitute such a default, except, in any such case, where the consequences, direct or indirect, of such default or defaults, if any, would not result in a Material Adverse Effect. -27- 5.15 Governmental Regulation. Neither the Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or to any Federal or state statute or regulation limiting its ability in any material way to incur Indebtedness for money borrowed. 5.16 Employee Benefit Plans. The Company and each of its ERISA Affiliates is in compliance in all material respects with any applicable provisions of ERISA and the regulations and published interpretations thereunder with respect to all Pension Plans. Neither the Company nor any of its ERISA Affiliates has participated in or participates in any Multiemployer Plan the withdrawal from which may result in any liability to any party in an amount in excess of $1,000,000. 5.17 Environmental Matters. The Company conducts in the ordinary course of business a review of the effect of existing Environmental Laws and existing Environmental Claims on its business, operations and properties, and as a result thereof the Company has reasonably concluded that such Environmental Laws and Environmental Claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 5.18 Disclosure. No representation or warranty of the Company contained in this Agreement or any other document, certificate or written statement furnished to the Banks by the Company since January 1, 2001 for use in connection with the transactions contemplated by this Agreement as of the date of this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to the officers of the Company in the case of any document or fact not furnished by it) necessary in order to make the statements contained herein or therein not misleading except to the extent that any such statement or omission that was untrue or misleading at the time made or that subsequently became untrue or misleading has been superseded or corrected by information provided to the Banks prior to the date of this Agreement. The projections and pro forma financial information contained in such written materials are based upon good faith estimates and assumptions believed by the Company to be reasonable at the time made, it being recognized by the Banks that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There is no fact known to the officers of the Company as of the date of this Agreement (other than matters of a general economic nature) which materially adversely affects the business, operations, property, assets or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, which has not been disclosed herein or in the written materials referred to in Section 5.08 other than as disclosed in writing ------------ to the Banks on or before the date hereof. 5.19 Subordination Agreements. Neither Fisher-Price nor Mattel Sales has any material outstanding obligations to any Affiliate of the Company which has not signed a Fisher-Price Subordination Agreement or a Mattel Sales Subordination Agreement, respectively. SECTION 6. AFFIRMATIVE COVENANTS. -28- The Company agrees from the Effective Date until payment in full of all Obligations and termination of the Commitments, unless Requisite Banks shall otherwise give prior written consent, the Company will perform all covenants in this Section 6. --------- 6.01 Reporting and Information Requirements. The Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. The Company will deliver to the Administrative Agent and to each Bank: (a) as soon as practicable and in any event not later than 55 days after the end of each of the first three fiscal quarters of the Company, consolidated balance sheets of the Company and its Subsidiaries as at the end of such period and for the fiscal year to date and the related consolidated statements of income, consolidated statements of stockholders' equity and consolidated statements of cash flow all in reasonable detail and certified by the Chief Financial Officer, Executive Vice President Finance or the Treasurer of the Company that the consolidated statements (and to the best of his or her belief, the consolidating statements) and other materials required by this clause (a) fairly present the financial condition of the Company and its Subsidiaries as at the dates indicated and the results of their operations for the periods indicated, subject to changes resulting from year-end audit and normal year-end adjustments; (b) as soon as practicable and in any event not later than 100 days after the end of each fiscal year of the Company, consolidated and consolidating balance sheets of the Company and its Subsidiaries as at the end of such year and the related consolidated (and, as to statements of income only, consolidated and consolidating) statements of income, stockholders' equity and cash flow of the Company and its Subsidiaries for such fiscal year, setting forth in each case, in comparative form the consolidated figures for the previous year, all in reasonable detail and (i) in the case of such consolidated financial statements, accompanied by a report thereon of Price Waterhouse or other independent accountants of recognized national standing selected by the Company which report shall state that such consolidated financial statements present fairly the financial position of the Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flow for the periods indicated in conformity with GAAP and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards and (ii) in the case of such consolidating financial statements, certified by the chief financial or accounting officer of the Company; (c) together with each delivery of financial statements of the Company and its Subsidiaries pursuant to clauses (a) and (b) above, an Officers' Certificate (i) stating that the signers have reviewed the terms of this Agreement and the Notes and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of the Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of the Officers' Certificate, of any condition or event which constitutes an Event of Default or Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof, and (ii) demonstrating in reasonable detail compliance during (to the extent -29- required) and at the end of such accounting periods with the restrictions contained in Sections 7.05 and 7.06. ------------- ---- (d) together with each delivery of consolidated financial statements of the Company and its Subsidiaries pursuant to clause (b) above, a written statement by the independent accountants giving the report thereon (i) stating that their audit examination has included a review of the terms of this Agreement and the Notes as they relate to accounting matters, and (ii) stating whether, in connection with their audit examination, any condition or event which constitutes an Event of Default or Default has come to their attention, and if such a condition or event has come to their attention, specifying the nature and period of existence thereof; provided that such accountants shall not be liable -------- by reason of any failure to obtain knowledge of any such Event of Default or Default that would not be disclosed in the course of their audit examination. The Administrative Agent shall have the right, from time to time, to discuss the affairs of the Company directly with such independent certified public accountants; (e) promptly upon receipt thereof, copies of all reports submitted to the Company (including, without limitation, the Company's Board of Directors) by the Company's independent accountants in connection with each annual, interim or special audit of the consolidated financial statements of the Company made by such accountants, including, without limitation, any comment letter submitted by such accountants to management in connection with their annual audit; (f) promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Company to its security holders or by any Subsidiary of the Company to its security holders other than the Company or another Subsidiary, and, promptly upon their becoming effective, and in any event within 15 days of filing, all regular and periodic reports and all registration statements and prospectuses that have been filed by the Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any Governmental Person succeeding to any of its functions, and all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning material developments in the business of the Company and its Subsidiaries; (g) promptly upon any executive officer of the Company obtaining knowledge (i) of any condition or event which constitutes an Event of Default or Default, or becoming aware that the Administrative Agent or any Bank has given any notice or taken any other action with respect to a claimed Event of Default or Default under this Agreement, (ii) of any condition or event which would be required to be disclosed in a current report filed by the Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4 and 6 of such Form as in effect on the date hereof) if the Company were required to file such reports under the Exchange Act, (iii) that any Person has given any notice to the Company or any Subsidiary of the Company or taken any other action with respect to a claimed default or event or condition of the type referred to in Section 8.01, (iv) of ------------ the institution of any litigation involving an alleged liability of the Company or any of its Subsidiaries equal to or greater than $20,000,000 or any adverse determination in any litigation involving a potential liability of the Company or any of its Subsidiaries equal to or greater than $20,000,000, or (v) of a Material Adverse Effect, in each case an Officers' Certificate specifying the nature and period of existence of any such condition -30- or event, or specifying the notice given or action taken by such holder or Person and the nature of such claimed default, Event of Default, Default, event or condition, and what action the Company has taken, is taking and proposes to take with respect thereto; (h) as soon as available but no later than March 31 of each year, copies of the Company's consolidated financial plan for the then current fiscal year as customarily prepared for internal use; (i) promptly after the acquisition of any Material Subsidiary, notice of such acquisition; (j) promptly upon any executive officer of the Company obtaining knowledge, notice of any change in the ratings on the Company's long-term unsecured Indebtedness by S&P, Moody's and, Fitch; and (k) with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries as from time to time may be reasonably requested by any Bank or the Administrative Agent, including any financial reports regularly prepared by the Company for internal use. 6.02 Corporate Existence, Etc. Except as permitted or not prohibited in Section 7.03, the Company will at all times preserve and keep in full force and - ------------ effect its corporate existence and rights and franchises material to its business and those of each of its Material Subsidiaries; provided that the -------- corporate existence and the rights and franchises of any Material Subsidiary may be terminated or permitted to lapse if such termination or lapse is in the best interest of the Company, is approved by the Board of Directors of the Company and is not materially disadvantageous to the holder of any Note. 6.03 Payment of Taxes and Claims; Tax Consolidation. The Company will, and will cause each of its Material Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its franchises, business, income or property before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim need be -------- paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. The Company will not, nor will it permit any Material Subsidiary to, file or consent to the filing of any consolidated income tax return with any Person (other than the Company or a Subsidiary of the Company). 6.04 Maintenance of Properties; Insurance. Except as permitted or not prohibited in Section 7.03, the Company will maintain or cause to be maintained ------------ in good repair, working order and condition all material properties (other than obsolete properties) used or useful in the business of the Company and its Material Subsidiaries and from time to time will make or cause to be made all appropriate repairs, renewals, substitutions and replacements thereof. The -31- Company will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Material Subsidiaries against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such other corporations; provided that the Company may maintain a program of self insurance for the Company and its Material Subsidiaries in accordance with sound business practices. 6.05 Inspection of Property and Books and Records. The Company shall maintain and shall cause each of its Subsidiaries to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiaries. The Company will permit any authorized representatives designated by any Bank at the expense of that Bank, to visit and inspect any of the properties of the Company or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom (but not records relating to intellectual property), and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all upon reasonable notice and at such reasonable times during normal business hours and as often as may be reasonably requested. 6.06 Use of Proceeds of Loans. The Company shall use the proceeds of Loans for general corporate purposes, including, without limitation, lending to its Subsidiaries and acquiring other Persons or businesses so long as the acquisition is approved by the board of directors of the Person being acquired. 6.07 Environmental Laws. The Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws, except where the failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.08 Subordination Agreements. If from time to time Fisher-Price or Mattel Sales has any material outstanding obligations owing to any Affiliate of the Company which has not signed a Fisher-Price Subordination Agreement or a Mattel Sales Subordination Agreement, respectively, the Company shall cause such Affiliate to execute deliver a Fisher-Price Subordination Agreement or a Mattel Sales Subordination Agreement, as the case may be, and deliver to the Administrative Agent a signature and incumbency certificate of the officers of each such Affiliate and cause Fisher-Price or Mattel Sales, as the case may be, to acknowledge each such agreement. -32- SECTION 7. NEGATIVE COVENANTS. The Company agrees from the Effective Date until payment in full of all Obligations and termination of the Commitments, unless Requisite Banks shall otherwise give prior written consent, the Company will perform all covenants in this Section 7. --------- 7.01 Secured Indebtedness. Other than as permitted under Section 7.02, the ------------ Company will not, and will not permit any of its Material Subsidiaries to, directly or indirectly incur, assume, guaranty or otherwise become directly or indirectly liable with respect to any Indebtedness which (a) is senior to the Obligations, (b) has any priority of payment over the Obligations or (c) is secured by Liens on any of the Company's or any Subsidiary's assets. 7.02 Liens. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of the Company or any Subsidiary except: (a) Liens securing Indebtedness for borrowed money not exceeding $100,000,000 in the aggregate at any time; (b) Liens existing on the date hereof; (c) Liens securing Indebtedness under the Receivables Purchase Agreement; (d) Liens securing Indebtedness under Other Permitted Accounts Receivable Financing Facilities; (e) Liens listed on Schedule 7.02; and ------------- (f) Liens on newly-acquired Capital Assets; provided that such Liens on -------- Capital Assets located in the United States shall not secure Indebtedness for borrowed money in excess of $25,000,000. 7.03 Restriction on Fundamental Changes. (a) The Company shall not, and shall not permit any of its Material Subsidiaries to, engage in any material line of business substantially different from those lines of business carried on by it on the date hereof; provided, -------- however, that the Company may engage in the production and sale of consumer - ------- software products related to the Company's existing lines of business. (b) the Company shall not, and shall not suffer or permit any of its Material Subsidiaries to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of whether in one transaction or in a series of transactions, all or substantially all, of its assets to or in favor of any Person, except: (i) (A) the Company may merge or consolidate with any other Person provided that the Company shall be the continuing or surviving corporation, and (B) any Material Subsidiary may merge or consolidate with any other Person provided that the -33- Company or a Material Subsidiary shall be the continuing or surviving corporation; provided, further, that (1) if any transaction shall be -------- ------- between a Subsidiary and a wholly-owned Subsidiary, the wholly-owned Subsidiary shall be the continuing or surviving corporation, (2) no Default or Event of Default shall result from such merger or consolidation, and (3) except where a wholly-owned Subsidiary merges or consolidates with another wholly-owned Subsidiary or the Company, no Default or Event of Default shall exist prior to such merger or consolidation; and (ii) any Subsidiary of the Company may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Company or another Wholly-Owned Subsidiary of the Company. 7.04 Sale or Discount of Receivables. The Company will not, and will not permit any of its Domestic Subsidiaries to, directly or indirectly, sell with or without recourse, or discount or otherwise sell for less than the face value thereof any of its notes or accounts receivable, except: (a) discounts offered in the ordinary course of business for early payment of accounts receivable and negotiated settlements of bad debts and disputed accounts receivable in the ordinary course of business; (b) sales of accounts receivable under the Receivables Purchase Agreement and agreements entered into in connection therewith; (c) sales of accounts receivable under Other Permitted Accounts Receivable Financing Facilities; and (d) sales of accounts receivable where the Company believes in good faith that the collectibility of such accounts receivable is or may be jeopardized by the distressed financial condition of the obligor under such accounts receivable. 7.05 Consolidated Funded Indebtedness to Total Capitalization. The Company shall not permit the ratio of the sum of (a) Consolidated Funded Indebtedness plus (b) Combined Purchasers' Investments to the sum of (x) ---- Consolidated Funded Indebtedness plus (y) Combined Purchasers' Investments plus ---- ---- (z) the consolidated net worth of the Company and its Subsidiaries on a consolidated basis determined in conformity with GAAP to exceed 60% at the end of each of the first three fiscal quarters in each fiscal year and 50% at the end of each fiscal year. 7.06 Interest Coverage Ratio. The Company shall not permit, as of the last day of each fiscal quarter, the ratio of (a) the sum of (i) its net income from continuing operations, for the four consecutive fiscal quarters ending on such date, before (A) special items, (B) minority interest, (C) gains on reacquisition of debt, plus (ii) income taxes accrued for the four consecutive ---- fiscal quarters ending on such date, plus (iii) interest accrued for the four ---- consecutive fiscal quarters ending on such date, excluding capitalized interest and without regard to interest income plus (iv) depreciation and amortization ---- for the four consecutive fiscal quarters ending on such date to (b) interest incurred for the four consecutive fiscal quarters ending on such date, including capitalized interest and without regard to interest income, to be less than 3.50 to 1. -34- 7.07 ERISA. The Company will not, and will not permit any of its ERISA Affiliates to, permit the actuarial present value of all benefit liabilities under all Pension Plans to exceed the fair market value of the assets of such Pension Plans (excluding Pension Plans with assets greater than vested benefits) allocable to such benefit liabilities by more than $10,000,000. As used in this Section 7.08, the terms "actuarial present value" and "benefit liabilities" have - ------------ the meanings specified in Section 4001 of ERISA. 7.08 Margin Regulations. No portion of the proceeds of any borrowing under this Agreement shall be used by the Company for the purpose of "purchasing" or "carrying" any Margin Stock or used in any manner which might cause such borrowing or the application of such proceeds to violate Regulation U, Regulation T, or Regulation X of the Federal Reserve Board or any other regulation of the Federal Reserve Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and the use of such proceeds. 7.09 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Default if such action is taken or condition exists. SECTION 8 EVENTS OF DEFAULT. 8.01 Events of Default. Any of the following conditions or events shall constitute an "Event of Default:" (a) Failure to Make Payments When Due. (i) Failure by the Company to pay any required payment of principal under this Agreement or of any Loan or any Notes, when due, whether at stated maturity, by acceleration, by notice of prepayment or otherwise, (ii) failure by the Company to pay any required payment of interest under this Agreement or on any Loan or any Note or any fees payable pursuant to Section 2 for a period of five days or more after the date such --------- payment is due, or (iii) failure by any Company Party to pay any other amount due under this Agreement within 90 days after written notice thereof; or (b) Default in Other Agreements. (i) Failure of the Company, Fisher-Price, Mattel Sales or any of its Material Subsidiaries to pay or any default in the payment of any principal or interest on any Indebtedness in an amount exceeding $15,000,000 or any default in any other obligation for the payment of money in an amount in excess of $15,000,000 beyond any period of grace allowed; or (ii) any breach or default (unless cured or waived) with respect to any other term of any evidence of such other Indebtedness for borrowed money in an amount exceeding $15,000,000 or of any loan agreement, mortgage, indenture or other agreement relating thereto, and such breach or default continues after the applicable grace or notice period, if any, specified in the document relating thereto, if the effect of such failure, default or breach is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness for borrowed money to become or be declared due prior to its stated maturity; or -35- (c) Breach of Certain Covenants. Failure of the Company to perform or comply with any term or condition contained in Sections 6.01(g), 6.02 or Section ---------------- ---- ------- 7 of this Agreement; or - - (d) Breach of Warranty. Any of the Company's, Fisher-Price's or Mattel Sales' representations or warranties made in any Loan Document in writing pursuant hereto or in connection herewith shall be false in any material respect on the date as of which made; or (e) Other Defaults Under Loan Documents or Receivables Purchase Agreement. Failure of the Company, Fisher-Price, Mattel Sales or Mattel Factoring, Inc., to perform or comply with any other term or condition contained in any Loan Document or the Receivables Purchase Agreement, in each case to the extent it is a party thereto, other than the conditions referred to in Subsections (a), (b), (c) and (d) above, and such default shall not have been remedied or waived within 30 days after receipt of notice from the Administrative Agent or any Bank of such default; or (f) Involuntary Bankruptcy; Appointment of Receiver, etc. (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Company or any of its Material Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed, or (ii) any other similar relief shall be granted under any applicable federal or state or applicable foreign law; a petition for an involuntary case shall be filed against the Company or any of its Material Subsidiaries under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over the Company or any of its Material Subsidiaries, or over all or substantially all of its property, shall have been entered; or an interim receiver, trustee or other custodian of the Company or any of its Material Subsidiaries for all or substantially all of the property of the Company or any of its Material Subsidiaries shall be appointed involuntarily; and the continuance of any such events in clause (ii) for 45 days unless dismissed, bonded or discharged; or (g) Voluntary Bankruptcy; Appointment of Receiver, etc. The Company or any of its Material Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in any involuntary case, or to the conversion from an involuntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, sequestrator, trustee or other custodian for all or substantially all of its property; the making by the Company or any of its Material Subsidiaries of any assignment for the benefit of creditors; or the inability or failure of the Company or any of its Material Subsidiaries, or the admission by the Company or any of its Material Subsidiaries in writing of its inability, to generally pay its debts as such debts become due; or the Board of Directors of the Company or any of its Material Subsidiaries adopts any resolution or otherwise takes action to approve any of the foregoing; or (h) Judgments. Any final money judgment involving in any case an amount in excess of $20,000,000 or in excess of $40,000,000 in the aggregate at any one time for all final judgments shall be entered or filed against the Company or any Material Subsidiary or any of -36- their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 45 days or in any event later than five days prior to the date of any proposed sale thereunder; or (i) Dissolution. Any order, judgment or decree shall be entered against the Company or any Material Subsidiary decreeing the dissolution or split up of the Company and such order shall remain undischarged or unstayed for a period in excess of 30 days; or (j) ERISA. (i) any Pension Plan maintained by the Company or any of its ERISA Affiliates shall be terminated within the meaning of Title IV of ERISA, or (ii) a trustee shall be appointed by an appropriate United States district court to administer any Pension Plan, or (iii) the Pension Benefit Guaranty Corporation (or any successor thereto) shall institute proceedings to terminate any Pension Plan or to appoint a trustee to administer any Pension Plan, or (iv) the Company or any of its ERISA Affiliates shall withdraw (under Section 4063 of ERISA) from a Pension Plan, if, as of the date of the event listed in clauses (i)-(iv) above or any subsequent date, any of the Company or its ERISA Affiliates has any liability (such liability to include, without limitation, any liability to the Pension Benefit Guaranty Corporation, or any successor thereto, or to any other party under Sections 4062, 4063 or 4064 of ERISA or any other provision of law) resulting from or otherwise associated with the events listed in clauses (i)-(iv) above for unfunded guarantied vested benefits under the Pension Plans which exceeds the current value of assets accumulated in such Pension Plan by more than $10,000,000; or (k) Loss of Property. All, or a substantial part of, the property, assets or business of the Company or any Material Subsidiary shall be condemned or seized and such condemnation or seizure shall have (after taking into account any insurance or condemnation award) a Material Adverse Effect; or (l) Cessation of Business. The Company or any Material Subsidiary shall at any time voluntarily or involuntarily suspend its business or a substantial part thereof which would constitute a substantial part of, and would have a Material Adverse Effect; or (m) Servicer Default. A Servicer Default (as defined in the Receivables Purchase Agreement) shall occur and be continuing; 8.02 Remedies. If any Event of Default occurs, the Administrative Agent shall, at the request of, or may, with the consent of, the Requisite Banks, (a) declare the Commitment of each Bank to make Loans to be terminated, whereupon such Commitments shall forthwith be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable; without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, -------- however, that upon the occurrence of any event specified in paragraph (f) or (g) - ------- of Section 8.01 above (in the case of clause (ii) of paragraph (f) upon the ------------ expiration of the 45-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans -37- and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Administrative Agent or any Bank. 8.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. SECTION 9. THE ADMINISTRATIVE AGENT. 9.01 Appointment and Authorization. Each Bank hereby irrevocably appoints, designates and authorizes the Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Administrative Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 9.02 Delegation of Duties. The Administrative Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in- fact that it selects with reasonable care. 9.03 Liability of Administrative Agent. None of the Administrative Agent- Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document, or for the value of any Collateral or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Administrative Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. -38- 9.04 Reliance by Administrative Agent. (a) The Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Requisite Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Requisite Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. (b) For purposes of determining compliance with the conditions specified in Sections 4.01 and 4.02, each Bank that has executed this Agreement shall be - ------------- ---- deemed to have consented to, approved or accepted or to be satisfied with each document or other matter either sent by the Administrative Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank, unless an officer of the Administrative Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from the Bank prior to any borrowing specifying its objection thereto and either such objection shall not have been withdrawn by notice to the Administrative Agent to that effect or the Bank shall not have made available to the Administrative Agent the Bank's ratable portion of such borrowing. 9.05 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of the Banks, unless the Administrative Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Banks. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be requested by the Requisite Banks in accordance with Section 8; provided, --------- -------- however, that unless and until the Administrative Agent shall have received any - ------- such request, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 9.06 Credit Decision. Each Bank expressly acknowledges that none of the Administrative Agent-Related Persons has made any representation or warranty to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries shall be deemed to constitute any representation or warranty by the Administrative Agent to any Bank. Each Bank represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent and based on such -39- documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated thereby, and made its own decision to enter into this Agreement and extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon the Administrative Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Administrative Agent, the Administrative Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Administrative Agent-Related Persons. 9.07 Indemnification. Whether or not the transactions contemplated hereby shall be consummated, the Banks shall indemnify upon demand the Administrative Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), ratably from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind whatsoever which may at any time (including at any time following the repayment of the Loans and the termination or resignation of the related Administrative Agent) be imposed on, incurred by or asserted against any such Person any way relating to or arising out of this Agreement or any document contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by any such Person under or in connection with any of the foregoing; provided, however, that no -------- ------- Bank shall be liable for the payment to the Administrative Agent-Related Persons of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including fees and expenses of counsel and the allocated cost of in-house counsel) incurred by the Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein to the extent that the Administrative Agent is not reimbursed for such expenses by or on behalf of the Company. Without limiting the generality of the foregoing, if the Internal Revenue Service or any other Governmental Person of the United States or other jurisdiction asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered, was not properly executed, or because such Bank failed to notify the Administrative Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by -40- any jurisdiction on the amounts payable to the Administrative Agent under this Section, together with all costs and expenses (including fees and expenses of counsel and the allocated cost of in-house counsel). The obligation of the Banks in this Section shall survive the payment of all Obligations hereunder. 9.08 Administrative Agent in Individual Capacity. Bank of America and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory or other business with the Company and its Subsidiaries and Affiliates as though Bank of America were not the Administrative Agent hereunder and without notice to or consent of the Banks. With respect to its Loans, Bank of America shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Administrative Agent, and the terms "Bank" and "Banks" shall include Bank of America in its individual capacity. 9.09 Successor Administrative Agent. The Administrative Agent may, and at the request of the Requisite Banks shall, resign as Administrative Agent upon 30 days' notice to the Banks. If the Administrative Agent shall resign as Administrative Agent under this Agreement, the Requisite Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Company. If no successor agent is appointed prior to the effective date of the resignation of the Administrative Agent, the Administrative Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term "Administrative Agent" shall mean such successor agent and the retiring Administrative Agent's appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent's resignation hereunder as Administrative Agent, the provisions of this Section 9 and Sections --------- -------- 10.04 and 10.15 shall inure to its benefit as to any actions taken or omitted to - ----- ----- be taken by it while it was Administrative Agent under this Agreement. If no successor agent has accepted appointment as Administrative Agent by the date which is 30 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Requisite Banks appoint a successor agent as provided for above. 9.10 Syndication Agent and Documentation Agent. None of the Banks identified on the facing page or signature pages of this Agreement as the Syndication Agent or the Documentation Agent shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified as the Syndication Agent or the Documentation Agent shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any of the Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. SECTION 10. MISCELLANEOUS. -41- 10.01 Assignments, Participations, Etc. (a) From time to time following the Effective Date, each Bank may assign to one or more Eligible Assignees all or any portion of its Commitment and outstanding Loans; provided that (i) such assignment, if not to a Bank or an -------- Affiliate of the assigning Bank, shall be consented to by the Company at all times other than during the existence of a Default or Event of Default and by the Administrative Agent (which approval of the Company shall not be unreasonably withheld or delayed), (ii) a copy of a duly signed and completed Assignment and Acceptance in the form of Exhibit H ("Assignment and Acceptance") --------- ------------------------- shall be delivered to the Administrative Agent and the Company, (iii) except in the case of an assignment (A) to an Affiliate of the assigning Bank or to another Bank or (B) of the entire remaining Commitment of the assigning Bank, the portion of the Commitment assigned shall not be less than $10,000,000, (iv) the assigning Bank shall have delivered any Note or Notes subject to the assignment to the Administrative Agent, and (v) the effective date of any such assignment shall be as specified in the Assignment and Acceptance, but not earlier than the date which is five Business Days after the date the Administrative Agent has received the Assignment and Acceptance. Upon satisfaction of the conditions set forth in the prior sentence, any forms required by Section 3.01(f) and payment of the requisite fee described below, --------------- the assignee named therein shall be a Bank for all purposes of this Agreement effective as of the specified effective date to the extent of the Assigned Interest (as defined in such Assignment and Acceptance), and the assigning Bank shall be released from any further obligations under this Agreement to the extent of such Assigned Interest. Until satisfaction of the conditions set forth herein to any assignment, the Company and Administrative Agent may continue to deal solely and directly with the assigning Bank in connection the Assigned Interest. Upon request following satisfaction of the conditions set forth herein to any assignment, the Company shall execute and deliver new or replacement Notes to the assigning Bank and the assignee Bank to evidence Loans made by them. The Administrative Agent's consent to any assignment shall not be deemed to constitute any representation or warranty by any Administrative Agent- Related Person as to any matter. (b) After receipt of a completed Assignment and Acceptance, and receipt of an assignment fee of $3,500 from such Eligible Assignee or such assigning Bank (including in the case of assignments to Affiliates of assigning Banks), the Administrative Agent shall, promptly following the effective date thereof, provide to Borrower and Banks a revised Schedule 10.06 giving effect thereto. -------------- (c) Upon advance written notice to the Company, any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment ----------- of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the -------- ------- originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company and the Administrative Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant shall have rights to approve any amendment to, or any consent or waiver with respect to this Agreement except to the extent such amendment, consent or waiver would require unanimous consent as described in the first proviso -42- to Section 10.08. The Company hereby acknowledges and agrees that any such ------------- disposition will give rise to a direct obligation of the Company to the Participant and the Participant shall be entitled to the benefit of Sections -------- 3.01, 3.04 and 10.15 as if it were a "Bank." In the case of any such - ---- ---- ----- participation, the Participant shall not have any rights under this Agreement, or any of the other Loan Documents, and all amounts payable by the Company hereunder shall be determined as if such Bank had not sold such participation, except that if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement. (d) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note(s) held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR (S)203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. (e) Each Bank agrees to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information provided to it by the Company or any Subsidiary of the Company, or by the Administrative Agent on such Company's or Subsidiary's behalf, in connection with this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information for any purpose or in any manner other than pursuant to the terms contemplated by this Agreement; except to the extent such information (i) was or becomes generally available to the public other than as a result of a disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, -------- ------- that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Person to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process and when required to do so in accordance with the provisions of any applicable Governmental Rule; provided, that a Bank shall -------- disclose only the information required by such request and shall notify the Company in advance of such disclosure so that the Company may seek an appropriate protective order, and (C) to such Bank's Affiliates, independent auditors and other professional advisors provided such Persons are obligated to keep such information confidential. Notwithstanding the foregoing, the Company authorizes each Bank to disclose to any Assignee or Participant and to any prospective Assignee or Participant, such financial and other information in such Bank's possession concerning the Company or its Subsidiaries which has been delivered to Administrative Agent or the Banks pursuant to this Agreement or which has been delivered to the Administrative Agent or the Banks by the Company in connection with the Banks' credit evaluation of the Company prior to entering into this Agreement; provided that, unless otherwise agreed by the Company, such -------- Assignee or Participant agrees in writing to such Bank to keep such information confidential to the same extent required of the Banks hereunder. 10.02 Survival of Warranties and of Certain Agreements. -43- (a) All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans hereunder and the execution and delivery of any Notes. (b) Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of the Company set forth in Sections 2.09, 3, 10.04 and ------------- - ----- 10.15 and the agreements of the Banks set forth in Sections 2.13, 9, 10.01(a), - ----- ---- - -------- 10.01(e) and 10.05 shall survive the payment of the Obligations by the Company - -------- ----- and the termination of this Agreement. 10.03 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any Bank or any holder of any Note in the exercise of any power, right or privilege hereunder or under any Note shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement or any Notes are cumulative to and not exclusive of, any rights or remedies otherwise available. 10.04 Fees and Expenses. Whether or not the transactions contemplated hereby shall be consummated, the Company agrees to pay within 30 days after submission of an invoice therefor (a) all the actual and reasonable out-of- pocket costs and expenses of preparation of the Loan Documents and all the costs of furnishing all opinions by counsel for the Company (including without limitation any opinions requested by the Banks as to any legal matters arising hereunder), and of the Company's performance of and compliance with all agreements and conditions contained therein on its part to be performed or complied with; (b) the cost of delivering to the Banks any Notes pursuant to the provisions of this Agreement; (c) the reasonable fees, expenses and disbursements of the Administrative Agent and the Administrative Agent's counsel (including the allocated cost of Administrative Agent's inhouse counsel and staff) in connection with the negotiation, preparation, execution and administration of the Loan Documents and the Loans and any amendments and waivers hereto; and (d) after the occurrence of an Event of Default, all actual and reasonable out-of-pocket costs and expenses (including reasonable fees of law firms engaged by the Banks and the reasonable estimate of the allocable costs of counsel in the staff of legal departments of the Banks and costs of settlement) incurred by the Administrative Agent and each Bank in enforcing any Obligations or in collecting any payments due from the Company hereunder or under any Notes by reason of such Event of Default or in connection with any refinancing or restructuring of any Loan Document in the nature of a "work-out" or of any insolvency or bankruptcy proceeding. 10.05 Set Off. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of and during the continuance of any Event of Default (after the giving of any notice and the expiration of any grace period contained in the definition thereof), each Bank and each subsequent holder of any Note is hereby authorized by the Company at any time or from time to time, without notice to the Company, or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate any and all deposits (including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured but not including trust accounts) and any other indebtedness at any time held or owing by that Bank or that subsequent holder or any Bank Affiliate thereof to or for the credit or the account of the Company and to apply any such -44- amounts in accordance with the provisions of Section 2.13 irrespective of ------------ whether or not that Bank or that subsequent holder shall have made any demand hereunder and each such Bank Affiliate is hereby irrevocably authorized to permit such setoff and appropriation. 10.06 Notices. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by United States mail and shall be deemed to have been given upon delivery in person, receipt of telecopy or telex or four Business Days after deposit in the United States mail, registered or certified, with postage prepaid and properly addressed. For the purposes hereof, the addresses of the parties hereto (until notice of a change thereof is delivered as provided in this Section 10.06) shall ------------- be as set forth under each party's name on Schedule 10.06. -------------- 10.07 Severability. In case any provision in or obligation under this Agreement or any Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.08 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Requisite Banks and the Company, and acknowledged by the Administrative Agent, and then such waiver shall be effective only in the specific instance and for the specific purpose for which given; provided, -------- however, that no such waiver, amendment, or consent shall, unless in writing and - ------- signed by all the Banks and the Company, and acknowledged by the Administrative Agent, do any of the following: (a) increase or extend any Bank's Commitment or subject any Bank to any additional obligations; (b) postpone or delay any date fixed for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or of any fees or other amounts payable hereunder or under any Loan Document; (d) change any Bank's Pro Rata Share or of the aggregate unpaid principal amount of any extension of credit which shall be required for the Banks or any of them to take any action hereunder; (e) amend this Section 10.08 or Section 2.13; ------------- ------------ (f) amend Section 2.01, the definitions of "Pro Rata Share" or "Requisite ------------ Banks;" or (g) discharge any Guarantor; provided further, that no amendment, waiver or consent shall, unless in writing - -------- ------- and signed by the Administrative Agent in addition to the Requisite Banks or all the Banks, as the case may be, -45- affect the rights or duties of the Administrative Agent under any Loan Document. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 10.08 shall be binding upon each holder of any Notes at the ------------- time outstanding, each future holder of the Notes and, if signed by the Company, on the Company. 10.09 Obligations Several. The obligation of each Bank hereunder is several, and no Bank shall be responsible for any obligation or commitment of any other Bank hereunder. Nothing contained in this Agreement and no action taken by Banks pursuant hereto shall be deemed to constitute Banks to be a partnership, an association, a joint venture or another entity. 10.10 Certain Changes. If (a) any changes in accounting principles from those used in the preparation of the financial statements referred to in Section ------- 5.08 hereafter occasioned by the promulgation of rules, regulations, - ---- pronouncements and opinions by or requested by the Financial Accounting Standards Board or the American Institute of Certified Public Accounts (or successors thereto or agencies with similar functions) result in a change in the method of calculation of financial covenants, standards or terms found in Sections 1, 6 and 7, or (b) the Company changes the manner in which its fiscal - -------- - - - year, fiscal quarters and fiscal months are determined, the parties hereto agree to enter into negotiations in order to amend the appropriate provisions of this Agreement so as to equitably reflect such changes with the desired result that the criteria for evaluating the Company's financial condition and operations or establishing limitations hereunder shall be the same after such changes as if such changes had not been made. 10.11 Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 10.12 Applicable Law. (a) This Agreement, any Notes and the other Loan Documents shall be governed by, and shall be construed and enforced in accordance with, the internal laws of the State of California, without regard to conflicts of laws principles. (b) Any legal action or proceeding with respect to this Agreement and any other Loan Documents may be brought in the courts of the State of California or of the United States for the Central District of California, and by execution and delivery of this Agreement, each of the Company, the Administrative Agent and the Banks consents, for itself and in respect of its property, to the non- exclusive jurisdiction of those courts. Each of the Company, the Administrative Agent and the Banks irrevocably waives any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any action or proceeding in such jurisdiction in respect of this Agreement or any document related hereto. The Company, the Administrative Agent and the Banks each waive personal service of any summons, complaint or other process, which may be made by any other means permitted by California law. -46- 10.13 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and each Bank. 10.14 Counterparts. This Agreement and any amendments, waivers, consents, or supplements may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 10.15 Indemnity. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Administrative Agent- Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") ------------------ harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable fees and out-of-pocket expenses of counsel and the allocated cost of internal counsel) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Administrative Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any proceeding of the type referred to in Section 8.01(f) or (g) or appellate --------------- --- proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); ----------------------- provided, that the Company shall have no obligation hereunder to any Indemnified - -------- Person with respect to Indemnified Liabilities resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. -47- IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement (364-Day Facility) to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. MATTEL, INC. By: /s/ William Stavro ---------------------------- William Stavro Senior Vice President and Treasurer S-1 ADMINISTRATIVE AGENT: BANK OF AMERICA, N.A., as Administrative Agent /s/ Gina Meador By:_____________________________ Gina Meador Vice President BANKS: BANK OF AMERICA, N.A., as a Bank /s/ Robert W. Troutman By:_____________________________ Robert W. Troutman Managing Director S-2 CITICORP USA, Inc., as Syndication Agent and a Bank /s/ Deborah Ironson By:_____________________________ Deborah Ironson Name:___________________________ Attorney in Fact Title:__________________________ S-3 ABN AMRO Bank N.V., as Documentation Agent and a Bank /s/ Ellen M. Coleman By:______________________________ ELLEN M. COLEMAN Name:____________________________ GROUP VICE PRESIDENT Title:___________________________ /s/ Delia B. France By:______________________________ DELIA B. FRANCE Name:____________________________ GROUP VICE PRESIDENT Title:___________________________ S-4 WELLS FARGO BANK, N.A. /s/ Lucy Nixon By:_____________________________ Lucy Nixon Name:___________________________ Vice President Title:__________________________ S-5 BANCA DI ROMA /s/ Luca Balestra By:_____________________________________ Luca Balestra (#25050) Name:___________________________________ Senior Vice President and Manager Title:__________________________________ /s/ Richard G. Dietz By:_____________________________________ Richard G. Dietz (#97271) Name:___________________________________ Vice President Title:__________________________________ S-6 THE BANK OF NOVA SCOTIA /s/ M. Van Otterloo By:________________________________ M. VAN OTTERLOO Name:______________________________ MANAGING DIRECTOR, CORPORATE Title:_____________________________ S-7 BARCLAYS BANK PLC /s/ Marlene Wechselblatt By:_______________________________ Marlene Wechselblatt Name:_____________________________ Vice President Title:____________________________ S-8 BNP PARIBAS /s/ James P. Culhane By: _________________________ Name: James P. Culhane Title: Vice President /s/ Mitchell M. Ozawa By: _________________________ Name: Mitchell M. Ozawa Title: Director S-9 CREDIT SUISSE FIRST BOSTON /s/ Robert Finney By:_____________________________ Name: Robert Finney Title: Managing Director /s/ Vitaly Butenko By:_____________________________ Name: Vitaly Butenko Title: Assistant Vice President S-10 FLEET NATIONAL BANK /s/ Jorge A. Schwarz By:_______________________________ Jorge A. Schwarz Name:_____________________________ Director Title:____________________________ S-11 THE INDUSTRIAL BANK OF JAPAN, LIMITED /s/ Yoshihiko Sugita By:________________________________ Yoshihiko Sugita Name:______________________________ SVP & DGM Title:_____________________________ S-12 SOCIETE GENERALE /s/ Richard Bernal By:________________________________ RICHARD BERNAL Name:______________________________ Director Corporate Banking Title:_____________________________ S-13 TORONTO DOMINION (TEXAS), INC. /s/ Warren Finlay By:_____________________________ Warren Finlay Name:___________________________ Vice President Title:__________________________ S-14 -----END PRIVACY-ENHANCED MESSAGE-----