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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-05647
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MATTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
333 Continental Boulevard
El Segundo, California 90245-5012
(Address of principal executive offices)
(310) 252-2000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value New York Stock Exchange
(and the associated Preference Share Purchase Pacific Exchange, Inc.
Rights)
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Securities registered pursuant to Section 12(g) of the Act:
(NONE)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 6, 2000 was $4,228,362,307.
Number of shares outstanding of registrant's common stock, $1.00 par value,
(including 3,109,270 common shares issuable upon exchange of outstanding
exchangeable shares of Softkey Software Products Inc.) as of March 6, 2000:
425,495,578 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Mattel, Inc. 2000 Notice of Annual Meeting of Stockholders
and Proxy Statement, to be filed with the Securities and Exchange Commission
within 120 days after the close of the registrant's fiscal year (Incorporated
into Part III).
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PART I
Item 1. Business
Mattel, Inc. ("Mattel") designs, manufactures, and markets a broad variety
of family products on a worldwide basis through both sales to retailers 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 design and develop innovative new products and product lines,
and successfully market those products and product lines. Mattel plans to
continue to focus on its traditional portfolio of brands which have
historically had worldwide sustainable appeal. For a description of Mattel's
portfolio of brands, see "Products--Toy Marketing."
Mattel has undertaken significant steps in recent years to augment its
portfolio of brands with additional product lines. In March 1997, Mattel
completed its merger with Tyco Toys, Inc. ("Tyco"), which at the time was the
third largest toy company in the US. As a result of the merger, Mattel added
the Matchbox(R), Tyco(R) Electric Racing, Tyco(R) Radio Control, Sesame
Street(R), Magna Doodle(R), and View Master(R) brands in their portfolio. In
July 1998, Mattel completed its acquisition of Pleasant Company, a Wisconsin-
based direct marketer of books, dolls, clothing, accessories and activity
products included under the American Girl(R) brand name. In May 1999, Mattel
merged with The Learning Company, Inc. ("Learning Company"), a developer and
publisher of a broad range of high quality branded consumer software for
personal computers sold both in North America and internationally. The merger
added the Carmen Sandiego(TM), Reader Rabbit(R), The Oregon Trail(R), National
Geographic(R), American Greetings(R), The Print Shop(R), Riven(R) and Myst(R)
brands to Mattel's portfolio. The merger was accounted for as a pooling of
interests, which means that for accounting and financial reporting purposes,
the two companies were treated as if they had always been combined.
The above acquisitions are part of a strategic plan by Mattel to better
position itself as a consumer products company that provides its core
customers--children--with products that meet their preferences in an
increasingly interactive and technology-driven world. The strategy has three
components.
First, Mattel is communicating with consumers more directly. Pleasant
Company is a premier direct marketer, using catalog and on-line sales over the
Internet as primary sales and marketing techniques. Learning Company has a
significant presence on the Internet. Mattel hopes to expand marketing of its
products through the individual sites of its world-renowned brands linked
through the nexus of Mattel.com. Through this Internet presence, Mattel.com can
showcase its brands in ways that will benefit Mattel's traditional retailers.
In addition, Mattel has worked with strategic and venture capital partners to
create stand-alone on-line ventures utilizing Learning Company assets, such as
Genealogy.com, LLC and GoodHome, LLC, in which Mattel retains an equity
interest.
The second component of Mattel's strategy is to combine its traditional and
recently acquired brands with new technologies, including software, electronic
games, interactive toys and new media. Through its integration of Learning
Company and Mattel Media into the Mattel Interactive division, Mattel has one
of the leading consumer software operations in the world. Mattel's joint
venture with Intel is focused on producing high-technology, interactive toys
that appeal to increasingly technology-oriented children and teenagers.
The third component of the strategy is the implementation of a "market by
market" approach to Mattel International. Mattel intends to grow its
international business by adapting products to local tastes, economic
conditions and price requirements. Mattel has seen the success of this approach
in the first product category for which it was implemented, the Wheels
products, which saw international sales growth of 20% in 1999. Mattel's 1999
strategic distribution agreement with Bandai Co. Ltd. ("Bandai"), the largest
toy company in Japan, to distribute Mattel products in Japan demonstrates how
this strategy may be implemented in many forms.
Mattel was incorporated in California in 1948 and reincorporated in Delaware
in 1968. Its executive offices are located at 333 Continental Boulevard, El
Segundo, California 90245-5012, telephone (310) 252-2000. Mattel maintains its
primary worldwide web site at www.mattel.com.
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Business Segments
"Mattel" refers to Mattel, Inc. and its subsidiaries as a whole, unless the
context requires otherwise. Mattel's reportable segments are separately managed
business units and include Toy Marketing, Consumer Software and Operations. The
Toy Marketing segment is divided on a geographic basis between domestic and
international. The domestic Toy Marketing segment is divided into USA Toys, US
Fisher-Price/Tyco Preschool and Other. USA Toys principally sells products in
Girls, Entertainment and Wheels categories. US Fisher-Price/Tyco Preschool
principally sells products in the Infant and Preschool categories. The Other
segment principally sells specialty products in the Girls category. The
International Toy Marketing segment sells products in all toy categories. The
Consumer Software segment consists of educational, productivity and
entertainment software products developed and sold by the Learning Company
division on a worldwide basis. The Operations segment manufactures toy
products, which are sold to the Toy Marketing segments. Products sold by the
Consumer Software segment are manufactured by third parties. For additional
information with respect to Mattel's business segment reporting, see Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Business Segment Results" and Note 8 to the
Consolidated Financial Statements.
Competition and Industry Background
Toy Marketing
Most of Mattel's revenues are derived from its Toy Marketing segments.
Competition in the toy industry is intense and is based primarily on price,
quality and play value. In recent years, the toy industry has experienced rapid
consolidation driven, in part, by the desire of industry competitors to offer a
range of products across a broader variety of categories. Mattel competes on a
worldwide basis with several large toy companies, including Hasbro, Inc. and
many small toy companies. Toy companies have pursued a strategy of focusing on
core product lines, which are expected to be marketed for an extended period of
time, and have historically provided relatively consistent growth in sales and
profitability. By focusing on core product lines, toy manufacturers have been
able to reduce their reliance on new product introductions and the associated
risk and volatility. The juvenile products market, in which Fisher-Price is one
of the leading companies, is more fragmented. The more significant competitors
in this area include: Century Products Company, Graco Children's Products, Inc.
and Evenflo Company, Inc.
The toy industry is also experiencing a shift toward greater consolidation
of retail distribution channels, such as large specialty toy stores and
discount retailers, including Wal-Mart, Toys R Us, Target, Kmart and Kay Bee
Toys, which have increased their overall share of the retail market. This
consolidation has resulted in an increased reliance among retailers on the
large toy companies because of their financial stability and ability to support
products through advertising and promotion and to distribute products on a
national basis. These retailers' growing acceptance of electronic data
interchange has provided toy manufacturers with an ability to more closely
monitor consumers' acceptance of a particular product or product line and has
provided retailers with the ability to more closely monitor their inventory
levels.
Over the last ten years, toy companies based in the US have expanded their
international marketing and manufacturing operations. Mattel believes a strong
international distribution system can add significantly to the sales volume of
core product lines within its international Toy Marketing segment, and extend
the life cycles of newly-developed products.
Consumer Software
The consumer software market has grown over the past few years, but
experienced a slowdown in 1999. The overall growth in this market is a result
of several major trends, including the increasing installed base of PCs in the
home, the improved multimedia capabilities of PCs and the increasing demand for
a greater number of high quality, affordably priced software applications. In
addition, consumers are exposed to software purchase opportunities from a wide
variety of sources and with increased frequency. The Internet has increased
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consumers' exposure to a variety of software products and technologies and
therefore increased their expectations for high quality multimedia educational
and reference software.
The demand for a large number and broad spectrum of value-priced software
products is having a significant impact on consumer software distribution. The
distribution of consumer software has expanded beyond traditional software
retailers and computer stores to include mass merchandisers, price clubs and
superstores. As demand for consumer software has grown with improvements in
multimedia technology, consumers have also grown more sophisticated in their
expectations for software, requiring increasingly easy to use, content rich
products. Furthermore, competition has continued to increase among new and
existing multimedia software publishers, increasing price pressure and
competition for limited retail shelf space. This competition has been
characterized by increased emphasis on channel marketing, coupon rebate
programs and advertising. As this trend continues, it will become increasingly
important for companies to achieve greater sell-through unit volumes by relying
on brand name recognition, to establish strong relationships with retailers and
to consistently launch new product offerings with state-of-the-art capabilities
and rich content.
The consumer software industry is very competitive and is characterized by
rapid changes in technology and customer requirements. Mattel competes for
retail shelf space and general consumer awareness with a number of companies
that market consumer software, including Microsoft Corporation, The Walt Disney
Company, Hasbro, Inc., IBM Corporation and Havas S.A. Mattel encounters
competition from both established companies, including the largest companies in
the industry, and new companies that may develop comparable or superior
products. In addition, the delivery of software via media other than CD-ROM,
including console cartridge and the Internet, has become increasingly
important.
In 1999, the production, assembly and distribution of consumer software
products for sale in North America, with certain exceptions (including
duplication of CD-ROM disks, school channel products and certain OEM products),
was performed primarily by two units of Bertelsmann AG. Mattel believes that
its existing production capacity is sufficient to handle anticipated increases
in volume and titles into the foreseeable future. Manufacturing and assembly of
consumer software products for sale internationally take place primarily at
third-party facilities.
Seasonality
Sales of toy products at retail are seasonal, with a majority of retail
sales occurring during the period from September through December.
Consequently, shipments of toy products to retailers are typically greater in
each of the third and fourth quarters than in the first and second quarters
combined. As the large toy retailers become more efficient in their control of
inventory levels, this seasonality increases. See "Risk Factors."
In anticipation of this seasonal increase in retail sales, Mattel
significantly increases its production in advance of the peak selling period,
resulting in a corresponding build-up of inventory levels in the first three
quarters of the year. In addition, Mattel and others in the toy industry
develop sales, advertising, promotion and merchandising programs with the
retailers to encourage them to purchase merchandise in periods other than the
peak holiday selling season. These programs, together with seasonal shipping
patterns, result in significant peaks in the third and fourth quarters in the
respective levels of inventories and accounts receivable, which result in
seasonal working capital financing requirements. See "Seasonal Financing."
In the fourth quarter of 1998, Mattel's domestic Toy Marketing segment
experienced unanticipated cutbacks in buying by toy retailers due to a shift by
these retailers to just-in-time inventory management systems. See "Risk
Factors." Under just-in-time inventory management systems, retailers are timing
reorders so that they are being filled by suppliers closer to the time of
purchase by consumers, rather than maintaining large on-hand inventories to
meet consumer demand. To respond to such shifts, Mattel took appropriate
actions to adjust its own shipping to more of a just-in-time pattern. As a
result, products that would have previously been shipped in advance of expected
consumer demand will be shipped closer to the time they are expected to be
purchased by the consumer.
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Products
Toy Marketing
Mattel's portfolio of brands can be grouped in the following four
categories:
. Girls--including Barbie(R) fashion dolls and accessories, collector
dolls, Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R) and
Polly Pocket(R);
. Infant and Preschool--including Fisher-Price(R), Disney preschool and
plush, Power Wheels(R), Sesame Street(R), See N Say, Magna Doodle(R),
View-Master(R) and Blues Clues(R);
. Wheels--including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing
and Tyco(R) Radio Control; and
. Entertainment--including Disney, Nickelodeon(R), games and puzzles.
In order to provide greater flexibility in the manufacturing and delivery of
products, and as part of a continuing effort to reduce manufacturing costs,
Mattel has concentrated production of most of its core brands in company-owned
facilities and generally uses independent contractors for the production of
non-core products and CD-ROMs.
With respect to new product introductions, Mattel's strategy is to begin
production on a limited basis until a product's initial success has been proven
in the marketplace. The production schedule is then modified to meet
anticipated demand. Mattel further limits its risk by generally having
independent contractors manufacture new product lines in order to minimize
capital expenditures associated with new product introductions. This strategy
has reduced inventory risk and significantly limited the potential loss
associated with new product introductions.
Consumer Software
The Consumer Software segment develops, publishes and markets software
products for PCs in the following categories: education, reference and
lifestyle, productivity, entertainment and Internet-related. The educational
products educate across every age, from young children to adults, striving for
recognition from retailers, parents, teachers and students as the leader in
educational and reference software. This segment's strategy is to leverage its
name brands and breadth of content by selling across a range of price points
and through multiple distribution channels.
Product Introductions
New product introductions for all segments during 1999 included:
. Intel(R)Play(TM) QX3(TM) microscope and CD-ROM
. Generation Girl(TM) Barbie(R), Millennium Princess(TM) Barbie(R), and
Barbie(R) Airplane
. My Size(TM) Kelly(R) and Kelly Club(TM) dolls,
. Nickelodeon(R) Snooze & Surprise(TM) Dil
. Hot Wheels(R) Ferrari products and Formula One die cast vehicles
. Tyco(R) RC X-Treme Cycle(TM) motorcycle
. Fisher-Price(R)Infant-to-Toddler Soothing Rocker
. Fisher-Price(R) Harley-Davidson(R) Power Wheels(R) child size motorcycle
. Fisher-Price(R) Briarberry Collection(TM)
. Educational Software CD-ROMS including Reader Rabbit(R), Clue
Finders(R), Carmen Sandiego(R), and Oregon Trail(R); Pokemon(R), Fisher
Price(R), Arthur(R), Little Bear(R) and Sesame Street(R) series;
Reference
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and Lifestyle Software CD-ROMS including Compton's Interactive
Encyclopedia, Encyclopedia Britannica, Mad Magazine and National
Geographic Magazine based products; Productivity Software CD-ROMS
including American Greetings(R), Print Shop(R) and PrintMaster(R) series
New product introductions planned for all segments during 2000 include:
. Intel(R)Play(TM) Computer Sound Morpher handheld sound recorder and CD-
ROM
. Intel(R)Play(R) Movie Creator(TM) digital video camera with editing
software
. Jewel Girl(TM) Barbie(R) doll with a redesigned athletic natural
physique with "soft" torso, wider hips, bellybutton and smaller bust and
Barbie(R) accessories such as 2000 Model Volkswagen Beetle vehicle and
Barbie(R) Rock 'N Roll Radio House(TM)
. Nickelodeon(R) Sing & Swing(TM) Angelica
. Max Steel(TM) line of high-tech designed action figures and vehicles
. Hot Wheels(R) Monster Jam(TM) WCW(TM), a line of 1:64 scale version of
United States Hot Rod Association monster trucks featuring World
Championship Wrestling(TM) decoration
. Hot Wheels(R) X-V Extreme skateboard figures and playset and electric
racing sets including X-Treme MotoCross(TM)
. Matchbox(R) Mega-Rig(R) modular vehicle playsets including themes such
as arctic submarine and jungle hovercraft
. Tyco(R) RC Speed Wrench(TM) truck with 8 interchangeable wheels
. Tyco(R) RC Racin' Ratz(TM) line of vehicles with headlights
. American Girls Collection(R) Samantha and Molly adventure CD-ROMS
. Fisher-Price(R) Intelli-Table(TM) developed with Microsoft Corporation
. Fisher-Price(R) voice controlled Robotic Puppy
. Fisher-Price(R) Jammin' Draw(TM)
. Educational Software CD-ROMS including Scooby Doo(R), Pokemon(R), Reader
Rabbit(R), Carmen Sandiego(R) and Arthur(R); Reference and
LifestyleSoftware CD-ROMS including For Dummies(R), National Geographic
and Mad Magazine based products, Productivity Software CD-ROMS including
American Greetings(R) and PrintShop(R) series; Entertainment Software
CD-ROMS including brand based products such Barbie(R), Hot Wheels(R),
Nickelodeon(R), Fisher-Price(R) and Cabbage Patch Kids(R); as well as
entertainment titles such as Pool of Radiance(TM), Earth 2150(R), Reach
For The Stars(TM) and Close Combat(R) PC, Nintendo(R)GameBoy(R) and
Sony(R) PlayStation(R) platforms
International Operations
Revenues from Mattel's international operations, including Toy Marketing and
Consumer Software, represented approximately 28% of total consolidated net
sales in 1999. Generally, products marketed internationally are the same as
those marketed domestically, although some are developed or adapted for
particular international markets. Mattel's products are sold directly in Canada
and most European, Asian and Latin American countries, and through agents and
distributors in those countries where Mattel has no direct presence. See
"Licenses and Distribution Agreements." For a description of a number of the
risks associated with Mattel's international operations, see "Risk Factors."
In 1999, Mattel entered into distribution agreements with Bandai, Japan's
largest toymaker, pursuant to which Mattel will distribute certain Bandai
products in Latin America and on a case-by-case basis in the US,
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and Bandai will distribute certain Mattel products in Japan. In 1999 and 2000,
Mattel ceased distribution through third-party distributors in Central America
and the Caribbean and will distribute products directly in those regions.
The strength of the US dollar relative to other currencies can significantly
affect the revenues and profitability of Mattel's international operations.
From time to time, Mattel enters into foreign currency forward exchange and
option contracts primarily as hedges of inventory purchases, sales and other
intercompany transactions denominated in foreign currencies to limit the effect
of exchange rate fluctuations on the results of operations and cash flows. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Instruments and --Foreign Currency Risk" and Note 6 to
the Consolidated Financial Statements. For financial information by geographic
area, see Note 8 to the Consolidated Financial Statements.
Product Design and Development
Toy Marketing
Through its product design and development group, Mattel regularly
refreshes, redesigns and extends existing toy product lines and develops
innovative new toy product lines. Mattel's success is dependent on its ability
to continue this activity. See "Risk Factors." Product design and development
are principally conducted by a group of professional designers and engineers
employed by Mattel.
Independent toy designers and developers bring products to Mattel and are
generally paid a royalty on the net selling price of products licensed by
Mattel. These independent toy designers may also create different products for
other toy companies.
Mattel devotes substantial resources to product design and development.
During the years ended December 31, 1999, 1998 and 1997, Mattel spent
approximately $208 million, $275 million and $246 million, respectively, in
connection with the design and development of products for the Toy Marketing
segment, exclusive of royalty payments. See Note 10 to the Consolidated
Financial Statements.
Consumer Software
Internal product development efforts related to consumer software are
designed to result in efficient and timely product introductions focusing on
"core code" development. Where possible, Mattel specifies, develops and manages
(or purchases) one base of source code from which many products are created.
Using one base of source code permits Mattel to maximize programming efficiency
because the investment of time and capital in developing the base source code
is shared among multiple products and additional programming time is minimized.
As a result, production schedules are more predictable and development costs
are lower since the underlying code for new programs has previously been tested
and debugged and the software already documented. Even with these "core codes",
Mattel must continuously update and improve the content and the technology of
its products in order to remain competitive.
In certain instances, Mattel's internally developed products contain
components that have been developed by outside developers or authors and are
licensed by Mattel. Mattel generally pays these outside developers/authors
royalties based on a percentage of net sales or on a work-for-hire basis.
Amortization of software development costs included in cost of goods sold
was $64.3 million, $20.2 million, and $12.1 million for the years ended
December 31, 1999, 1998 and 1997, respectively. See Note 1 to the Consolidated
Financial Statements.
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Advertising, Marketing and Sales
Mattel supports its product lines with extensive advertising and consumer
promotions. Advertising continues at varying levels throughout the year and
peaks during the Christmas season. Advertising includes television and radio
commercials, and magazine and newspaper advertisements. Promotions include in-
store displays, coupons, merchandising materials and major events focusing on
products and tie-ins with various consumer products companies. Separately, a
total of twenty-five BARBIE Boutiques are located in F.A.O. Schwarz toy stores,
including the "BARBIE on Madison" boutique at the F.A.O. Schwarz flagship store
in New York City. In November 1998, Mattel opened its first store, American
Girl Place(TM), in Chicago featuring children's products from Pleasant Company.
During the years ended December 31, 1999, 1998 and 1997, Mattel spent
approximately $946 million (17% of net sales), $918 million (16% of net sales),
and $846 million (16% of net sales) respectively, on worldwide advertising and
promotion.
During the year ended December 31, 1999, Mattel's two largest customers,
Wal-Mart and Toys R Us, accounted for approximately 33% of consolidated net
sales. See "Risk Factors."
Toy Marketing
Mattel's products are sold throughout the world. Products within the
domestic Toy Marketing segment are distributed directly to large retailers,
including discount and free-standing toy stores, chain stores, department
stores, other retail outlets and, to a limited extent, wholesalers. Discount
toy stores continue to increase their market share. Products within the
international Toy Marketing segment are sold directly in Canada and most
European, Asian and Latin American countries, and through agents and
distributors in those countries where Mattel has no direct presence.
Mattel has also been focusing on direct-to-consumer sales, through both its
direct-to-consumer catalogue business and by taking advantage of e-commerce
over the Internet. During 1998 and 1999, Mattel introduced websites that
support its numerous core products. Consumers can purchase many of Mattel's
products over the Internet, including Barbie(R) collector dolls, Mattel
Media(R) software products, and Hot Wheels(R) and Matchbox(R) collectibles.
Mattel believes that increasing its focus on direct-to-consumer sales will help
to maximize sales of its products and create a better balance between direct-
to-consumer sales and sales to traditional retailers. The Other segment markets
its products, including the American Girl(R) brand, via direct-to-consumer
catalogs and over the Internet.
In general, Mattel's major domestic and international customers review its
toy product lines and product concepts for the upcoming year at showings
beginning in late summer and at the American International Toy Fair in New York
in February.
Through its marketing research departments, Mattel conducts basic consumer
research and product testing and monitors demographic factors and trends. This
information assists Mattel in evaluating consumer acceptance of products,
including whether there is increasing or decreasing demand for its products.
Consumer Software
The Consumer Software segment distributes its consumer software products
through retail, direct response, on-line, OEM and school channels within North
America and through international channels throughout Europe and the Pacific
Rim.
Retail Channels. The Consumer Software segment has relationships with the
national retailers and direct distributors responsible for most of the nation's
software sales. The segment's retail distribution strategy is to foster strong
direct relationships with large retailers through a broad product offering,
active participation in channel management and innovative merchandising. For a
discussion of problems related to the Consumer Software retail channels in
1999, see "Risk Factors."
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Direct Response. The Consumer Software segment typically utilizes targeted
customer mailings highlighting specific products. Prior to a full mailing, test
mailings are conducted at different price points and marketing approaches in
order to maximize response rates from customers. This segment also sells its
products through direct mailings to potential end-users who are not part of the
installed user base using rented mailing lists. Electronic registration of
consumer software products previously sold allows this segment to collect data
from its customers that in turn provide customer leads for its direct response
business. An Internet website contains a catalog of the Consumer Software
segment's products that consumers can use to browse through the segment's
products and submit orders on-line or by telephone.
Original Equipment Manufacturers. The OEM sales strategy is to assist
hardware manufacturers and on-line services to differentiate their product
lines and to introduce Mattel's brands to new computer hardware buyers. This
segment licenses its software products to OEMs (including IBM, Apple, Compaq,
Hewlett-Packard, America On-Line and Patriot Computers), which typically
purchase products in higher volumes and at lower prices than retail stores and
distributors.
School Channel. The school channel focuses its efforts on the unique needs
of the school market through targeted and specialized marketing and services.
Products are sold directly to schools and school districts through field based
direct sales representatives, telemarketing and direct mail. Sales are also
made through authorized resellers and distributors including Educational
Resources and Ingram Micro. Through Mattel's subsidiary Learning Services Inc.,
this segment publishes an educational software catalog for teachers and schools
marketing products from most educational software publishers under the Learning
Services brand.
Operations Segment
The Operations segment manufactures toy products, either in company-owned
facilities and by independent contractors, which are sold to the Toy Marketing
segment. Products are also purchased from unrelated entities that design,
develop and manufacture the products. In order to provide greater flexibility
in the manufacture and delivery of products, and as part of a continuing effort
to reduce manufacturing costs, Mattel has concentrated production of most of
its core products in Mattel's facilities and generally uses independent
contractors for the production of non-core products and CD-ROMs. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Manufacturing Risk."
Mattel's primary toy manufacturing facilities are located in the states of
Kentucky and Oregon, and in Mexico, China, Indonesia, Malaysia, Thailand and
Italy. Mattel also utilizes independent contractors to manufacture products in
the US, Europe, Mexico, the Far East and Australia. To help avoid disruption of
its product supply due to political instability, civil unrest, economic
instability, changes in government policies and other risks, Mattel produces
many of its key products in more than one facility. During 1999, Mattel closed
three of its higher cost manufacturing facilities. See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Restructuring and Other Charges" and Note 7 to the Consolidated Financial
Statements. Mattel believes that its existing production capacity at its toy
manufacturing facilities is sufficient to handle expected volume in the
foreseeable future.
Mattel bases its production schedules for toy products on customer orders,
modified by historical trends, results of market research and current market
information. The actual shipments of products ordered and the order
cancellation rate are affected by consumer acceptance of the product line, the
strength of competing products, marketing strategies of retailers and overall
economic conditions. Unexpected changes in these factors can result in a lack
of product availability or excess inventory in a particular product line.
All foreign countries in which Mattel's products are manufactured
(principally China, Indonesia, Malaysia and Mexico) currently enjoy "normal
trade relations" ("NTR") status under US tariff laws, which provides a
favorable category of US import duties. As a result of continuing concerns in
the US Congress regarding China's human rights policies, and disputes regarding
Chinese trade policies, including the country's inadequate protection of US
intellectual property rights, there has been, and may be in the future,
opposition to the annual
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extension of NTR status for China. In 2000, however, there will be, for the
first time, a major effort in the US Congress to pass legislation that would
make permanent China's NTR status in return for the country's expected
accession to the World Trade Organization.
The loss of NTR status for China would result in a substantial increase in
the import duty for toys manufactured in China and imported into the US and
would result in increased costs for Mattel and others in the toy industry. See
"Risk Factors." The impact of such an event on Mattel could be somewhat
mitigated by Mattel's ability to source product for the US market from
countries other than China and ship products manufactured in China to markets
outside the US. As a result, Mattel has expanded its production capacity in
other countries. Other factors, including Mattel's ability to pass along the
added costs through price increases and the pricing policies of vendors in
China, could also mitigate the impact of a loss of China's NTR status.
With the implementation of the Uruguay Round agreement effective January 1,
1995, all US duties on dolls and traditional toys were completely eliminated.
Canada also eliminated its tariffs on dolls and most toy categories in 1995,
with the exception of certain toy sets and board games that will have their
duties eliminated over ten years. Meanwhile, both the European Union and Japan
are in the process of implementing Uruguay Round tariff concessions that
reduced their tariffs on dolls by 40 percent and 15 percent, respectively, as
of January 1, 1999, and will lead to the phased elimination of their duties on
several other toy categories by January 1, 2004.
Virtually all of Mattel's raw materials are available from numerous
suppliers. Prices for resin and packaging materials began rising late 1999, and
this trend is continuing into year 2000. Mattel has long-term agreements in
place with major suppliers which allows them to only pass on their actual raw
material cost increases.
Commitments
In the normal course of business, Mattel enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect Mattel's right to create and
market certain products. Certain of these commitments routinely contain
provisions for guaranteed or minimum expenditures during the term of the
contracts. Current and future commitments for guaranteed payments reflect
Mattel's focus on expanding its product lines through alliances with businesses
in other industries.
As of December 31, 1999, the Operations segment had outstanding commitments
for 2000 purchases of inventory of approximately $92 million. Licensing and
similar agreements with terms extending through the year 2007 contain
provisions for future guaranteed minimum payments aggregating approximately
$346 million for both the Toy Marketing and Consumer Software segments. See
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Commitments" and Note 6 to the Consolidated Financial
Statements.
Licenses and Distribution Agreements
License agreements with third parties permit Mattel to utilize the
trademark, character or product of the licensor in its product line across all
marketing segments. Mattel's level of licensing activity has expanded in recent
years. Royalty expense during the years ended December 31, 1999, 1998 and 1997
was approximately $309 million, $234 million and $226 million, respectively.
See "Product Design and Development" and Note 6 to the Consolidated Financial
Statements.
Mattel distributes finished products that are independently designed and
manufactured. Mattel also licenses a number of its trademarks, characters and
other property rights to others for use in connection with the sale of non-toy
and other products that do not compete with Mattel's products.
10
Mattel has license agreements with third parties that permit Mattel to
utilize the trademark, character, or product of the licensor in its product
line. A principal licensor is The Walt Disney Company, which licenses many of
its characters and entertainment properties for use on Mattel's products.
Mattel also has entered into license agreements with, among others: Children's
Television Workshop relating to its Sesame Street(R) properties; Viacom
International, Inc. relating to its Nickelodeon(R) properties; Ferrari Idea
S.A. for use of the Ferrari trademark; and Original Appalachian Artworks, Inc.
for Cabbage Patch Kids(R). A number of these licenses relate to product lines
that are significant to Mattel's business and operations.
In January 2000, Mattel and Warner Bros. Worldwide Consumer Products signed
a licensing agreement making Mattel the worldwide master toy licensee for the
literary characters from the Harry Potter books published by J.K. Rowling as
well as for feature film and television properties developed by Warner Bros.
Pictures featuring the Harry Potter characters. Mattel's worldwide toy
licensing agreement involves the first two Harry Potter books and theatrical
films. This agreement contains minimum royalty guarantees and has a term of
four years, provided that the second theatrical film is released prior to
January 1, 2003. If the second theatrical film is released subsequent to
January 1, 2003, the agreement will be extended to a date twelve months after
the release of the second theatrical film. Pursuant to the agreement, Mattel
issued Warner Bros. Consumer Products a stock warrant to purchase 3.0 million
shares of Mattel's common stock. This warrant became fully vested and
exercisable upon signing of the licensing agreement.
Financial Instruments
To limit the impact associated with the exposure to currency exchange rate
fluctuations, Mattel enters into foreign currency forward exchange and option
contracts primarily to hedge its purchase of inventory, sales and other
intercompany transactions denominated in foreign currencies. These contracts
are intended to fix a portion of Mattel's product cost and intercompany cash
flows, and thereby limit the effect of foreign currency fluctuations on
Mattel's results of operations and cash flows. Mattel does not trade in
financial instruments for speculative purposes.
For additional information regarding foreign currency contracts, see
"International Operations" above, Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Foreign Currency Risk", and
Note 6 to the Consolidated Financial Statements.
Seasonal Financing
Mattel's financing of seasonal working capital typically grows throughout
the first half of the year and peaks in the third or fourth quarter, when
accounts receivable are at their highest due to increased sales volume and
sales programs, and when inventories are at their highest in anticipation of
expected second half sales volume. See "Seasonality." Mattel expects to finance
its seasonal working capital requirements for the coming year by using existing
and internally generated cash, issuing commercial paper and selling certain
trade receivables under its committed revolving credit facility, and using
various short-term bank lines of credit. See "Risk Factors." 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 affiliates.
Mattel maintains and periodically amends or replaces an unsecured committed
revolving credit agreement with a commercial bank group that is used as the
primary source of financing the seasonal working capital requirements of its
domestic and certain foreign affiliates. The agreement in effect during 1999
consisted of a committed unsecured facility providing a total of up to $1.0
billion in seasonal financing (a five-year facility that expires in 2003).
Within the facility, up to $700.0 million was a standard revolving credit line
available for advances and backup for commercial paper issuances. Interest was
charged at various rates selected by Mattel, ranging from market commercial
paper rates to the bank reference rate. The remaining $300.0 million was
available for nonrecourse purchases of certain trade accounts receivable of
Mattel by the commercial bank group providing the credit line. The agreement
required Mattel to comply with certain financial covenants for
11
consolidated debt-to-capital and interest coverage, and Mattel was in
compliance with such covenants during 1999. This agreement will continue to be
in effect during 2000. In addition, Mattel avails itself of uncommitted
domestic facilities provided by certain banks to issue short-term money market
loans.
Mattel is currently in the process of negotiating a 364 day, $400 million
companion facility to its existing $1.0 billion credit facility, with
essentially the same group of commercial banks. The terms and conditions of the
companion facility will be similar to the existing $1.0 billion facility.
Mattel expects to have the companion facility in place by the end of April
2000.
Mattel believes the amounts available under its committed revolving credit
facility, its uncommitted money market facility and its foreign credit lines
will be adequate to meet its seasonal financing requirements.
Trademarks, Copyrights, and Patents
Most of Mattel's products are sold under trademarks, trade names and
copyrights and a number of those products incorporate patented devices or
designs. Trade names and trademarks are significant assets of Mattel in that
they provide product recognition and acceptance worldwide.
Mattel customarily seeks patent, trademark or copyright protection covering
its products, and it owns or has applications pending for US and foreign
patents covering many of its products. A number of these trademarks and
copyrights relate to product lines that are significant to Mattel's business
and operations. Mattel believes its rights to these properties are adequately
protected but there can be no assurance that its rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.
See "Risk Factors."
Mattel also licenses a number of its trademarks, characters and other
property rights to others for use in connection with the sale of non-toy and
other products that do not compete with Mattel's products.
Consistent with industry practice in the Consumer Software segment, Mattel
does not have signed license agreements with the end-users of its software
products, and its software products do not contain mechanisms to inhibit
unauthorized copying. Instead, Mattel relies on the copyright laws to prevent
unauthorized distribution of its software. Mattel also relies on a combination
of trade secret, patent, trademark and other proprietary rights, laws and
license agreements to protect its proprietary rights. Existing copyright laws
afford only limited protection. It may be possible for unauthorized third
parties to copy Mattel's software products or to obtain and use information
Mattel regards as proprietary.
Policing unauthorized use and distribution of Mattel's software products is
difficult, and while it is difficult to determine the extent to which such use
or distribution exists, software piracy can be expected to be a persistent
problem. These problems are particularly acute in certain international markets
such as South America, the Middle East, the Pacific Rim and the Far East, and
the laws of certain countries in which Mattel's products are or may be
distributed provide less protection than those of the US.
Government Regulations
Mattel's toy products sold in the US are subject to the provisions of the
Consumer Product Safety Act, the Federal Hazardous Substances Act, the
Flammable Fabrics Act, and the Food, Drug and Cosmetics Act, and the
regulations promulgated thereunder. The Consumer Product Safety Act and the
Federal Hazardous Substances Act enable the Consumer Product Safety Commission
to exclude from the market consumer products that fail to comply with
applicable product safety regulations or otherwise create a substantial risk of
injury, and articles that contain excessive amounts of a banned hazardous
substance. The Consumer Product Safety Commission may also require the recall
and repurchase or repair by the manufacturer of articles that are banned.
Similar laws exist in some states and cities and in various international
markets. See Item 3 "Legal Proceedings."
12
Fisher-Price's car seats are subject to the provisions of the National
Highway Transportation Safety Act, which enables the National Highway Traffic
Safety Administration to promulgate performance standards for child restraint
systems. Fisher-Price conducts periodic tests to ensure that its child
restraint systems meet applicable standards. A Canadian agency, Transport
Canada, also regulates child restraint systems sold for use in Canada. As with
the Consumer Product Safety Commission, the National Highway Transportation
Safety Administration and Transport Canada can require the recall and
repurchase or repair of products that do not meet their respective standards.
Mattel maintains a quality control program to ensure product safety
compliance with the various federal, state and international requirements.
Notwithstanding the foregoing, there can be no assurance that all of Mattel's
products are or will be hazard-free. Any material product recall could have a
material adverse effect on Mattel's results of operations and financial
condition and could also negatively effect Mattel's reputation and the sales of
other Mattel products.
Mattel's advertising is subject to The Children's Television Act of 1990 and
the rules promulgated by the US Federal Communications Commission as well as
laws of certain countries that place certain limitations on television
commercials during children's programming. Mattel is subject to various other
federal, state and local laws and regulations applicable to its business.
Mattel believes that it is in substantial compliance with these laws and
regulations.
Effects of Inflation
Inflation rates in the US and in major foreign countries where Mattel does
business have not had a significant impact on its results of operations or
financial condition during the three year period ended December 31, 1999. The
US Consumer Price Index increased 2.7% in 1999, 1.6% in 1998 and 1.7% in 1997.
Mattel receives some protection from the impact of inflation from high turnover
of inventories and its ability to pass on higher prices to customers.
Employees
The total number of persons employed by Mattel and its subsidiaries at any
one time varies because of the seasonal nature of its manufacturing operations.
At December 31, 1999, Mattel's total number of employees, including its
international operations, was approximately 31,000.
Risk Factors
This Risk Factors section is written to be responsive to the Securities and
Exchange Commission's "Plain English" guidelines. In this section the words
"we", "our", "ours" and "us" refer only to Mattel, Inc. and its subsidiaries
and not any other person.
Set forth below and elsewhere in this Form 10-K and in other documents we
file with Securities and Exchange Commission are important risks and
uncertainties that could cause our actual results of operations, business and
financial condition to differ materially form the results contemplated by the
forward-looking statements contained in this Form 10-K. See Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statement."
We may not realize the expected benefits from the merger with Learning Company,
such as cost savings, operating efficiencies, revenue enhancements and other
synergies, due to difficulties integrating Mattel and Learning Company.
We merged with Learning Company with the expectation that the merger would
result in a number of benefits, including cost savings, operating efficiencies,
revenue enhancements and other synergies. Due to the factors explained in Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
13
Operations--1999 Compared to 1998--Consolidated Results", we have not yet
realized many of the expected benefits from the merger. Our inability to
successfully integrate the operations and personnel of the companies, or any
further significant delay in achieving integration, could have a material
adverse effect on our business, financial condition and results of operations.
Integrating the operations and personnel of Mattel and Learning Company has
been a complex process, and we cannot assure you that the integration will
result in the realization of the anticipated benefits of the merger. Any
further difficulties encountered in the process of combining the companies
could cause additional disruption of the activities of our business.
Our Consumer Software segment, the Learning Company division, experienced
significant performance shortfalls in 1999 that may continue.
Our Learning Company division reported pre-tax losses of $205.5 million in
1999. The negative results were caused by a combination of factors, including:
. a decrease in sales of the division's products;
. higher proportion of sales of relatively lower priced and lower margin
products;
. greater use of rebates due to competitive pressures;
. higher price and marketing concessions to retailers; and
. increased bad debt write-offs because of certain financially troubled
distributors.
We have recently formulated a plan aimed at correcting the problems,
including:
. more strict sales control policy with distributors and retailers;
. decreased use of rebates to consumers and price and marketing
concessions to distributors and retailers;
. new divisional management;
. shifts in product mix towards higher margin products; and
. expansion into game consoles and the Internet.
There can be no assurance that the Learning Company division's results will
improve in 2000. In particular, the decrease in sales of the division's CD-ROM
products may continue. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--1999 Compared to 1998--
Consolidated Results."
In response to industry trends, we are implementing a business strategy
emphasizing initiatives such as products incorporating software and other
interactive features, other high technology products and the use of marketing
and sales over the Internet.
We have developed a business strategy to adapt to several trends that in
recent years have combined to change the toy business. These trends include:
. increasing use of high technology;
. the advent of the Internet;
. the mass popularity of video games and hand-held electronic games; and
. the phenomenon of children outgrowing toys at younger ages, particularly
in favor of interactive and high technology products.
In response to these changes, we have increased our development of toys
which incorporate technology and interactive features, enlarged our software
business, combined our traditional brands with new play platforms and invested
in an Internet strategy. There can be no assurance that this strategy will help
us increase or maintain our sales or earnings in the future, or that our
investments in these initiatives will be profitable.
14
Our business may suffer due to losses of key employees or if we fail to attract
and retain additional employees.
Recently, there has been substantial turnover in our senior management and
we are in the process of searching for a new Chief Executive Officer. Our
future success will depend to a significant extent on the continued service of
our remaining senior management and other key employees and the hiring of new
qualified employees, including a new Chief Executive Officer. In general,
competition for highly-skilled business, product development, technical and
other personnel is becoming more intense due to lower overall unemployment
rates and competition with Internet or other startup companies. Competition for
employees in the consumer and interactive software business is particularly
intense. The high market valuations, large equity positions offered to key
employees and creative talent, and the potential for rapid stock price
appreciation of Internet companies make their compensation packages attractive
to new employees as well as to employees who are already working in more mature
companies. This situation makes it difficult for us to retain and attract
senior management and other key employees to all portions of our business.
Accordingly, we expect to experience increased compensation costs that may not
be offset through either improved productivity or higher prices.
We cannot assure you that we will be successful in continuously recruiting
new personnel and in retaining existing personnel. Any significant delay in
finding a qualified Chief Executive Officer, the loss of other key employees or
our inability to attract additional qualified employees could have a material
adverse effect on our business, financial condition and results of operations.
The consumer software industry is dynamic and highly competitive, and we cannot
assure you that we will grow or maintain our market share in this market.
The process of developing software products such as those we offer is
extremely complex and is becoming more complex and expensive over time. Our
consumer software product development expense levels are based largely on
expectations regarding future sales. Accordingly, operating results would be
disproportionately adversely affected by a decrease in sales or a failure to
meet our sales expectations due to delays in new product introductions or lower
than expected demand. If we do not accurately anticipate and successfully adapt
our consumer software products to emerging platforms, environments and
technologies, or new products are not launched when planned or do not achieve
anticipated revenues, it could have a material adverse effect on our business,
financial condition and results of operations.
Rapid changes in technology, product obsolescence and advances in computer
software and hardware require us to develop or acquire new products and to
enhance our existing products on a timely basis. The consumer software
marketplace has recently experienced a higher emphasis on on-line and Internet-
related services and content tailored for this new distribution channel. To the
extent that demand increases for on-line products and content, the demand for
our existing consumer software products may decline. There can be no assurance
that we will be able to maintain market share and otherwise compete
successfully in the future, or that the market for our products will not erode.
Companies with substantial bases of intellectual property content in the
motion picture and media industries, sophisticated product marketing and
technical abilities and/or financial resources that may not need to realize an
immediate profit or return on investment have increasingly entered the consumer
software market. These competitors include: Microsoft Corporation, The Walt
Disney Company, Hasbro, Inc., IBM Corporation and Havas S.A. For example,
technology companies have begun to acquire greater access to branded content,
and content-oriented companies have begun to acquire greater technological
capabilities. To the extent that competitors achieve a performance, price or
distribution advantage, we could be adversely affected. Furthermore, increased
consolidation of the consumer software market may impact future growth
potential and performance.
There can be no assurance that we will be able to effectively compete in
existing distribution channels or new and emerging channels, such as the
Internet, cable or telephone line delivery modes.
15
Consumer preferences are difficult to predict and the introduction of new
products is critical in our industry.
Our business and operating results depend largely upon the appeal of our toy
products. Our continued success in the toy industry will depend on our ability
to redesign, restyle and extend our existing core products and product lines
and to develop, introduce and gain customer acceptance of new products and
product lines. However, consumer preferences in this industry are continuously
changing and are difficult to predict. Individual products typically have short
life cycles. There can be no assurance that:
. any of our current products or product lines will continue to be popular
for any significant period of time;
. any new products and product lines introduced by us will achieve an
adequate degree of market acceptance; or
. any new products' life cycles will be sufficient to permit us to recover
development, manufacturing, marketing and other costs of the products.
A decline in the popularity of our existing products and product lines or
the failure of new products and product lines to achieve and sustain market
acceptance and to produce acceptable margins could have a material adverse
effect on our business, financial condition and results of operations.
We are involved in several litigation matters in which the outcome is uncertain
and could entail significant expense.
As described under Item 3 "Legal Proceedings", we are currently involved in
a number of litigation matters including a number of purported securities class
action claims stemming from the merger with Learning Company and the
performance of the Learning Company division in the second half of 1999. The
pending litigation against us and our directors, regardless of the outcome, may
result in substantial costs and expenses and significantly divert the attention
of our management. There can be no assurance that we will be able to achieve a
favorable settlement of the pending litigation or obtain a favorable resolution
of such litigation if it is not settled. An unfavorable resolution of the
pending litigation could have a material adverse effect on our business,
financial condition and results of operations.
Our business is dependent on our two largest customers, which together
accounted for approximately 33% of Mattel's net sales in fiscal 1999.
A small number of our customers account for a large share of our net sales.
For the year ended December 31, 1999, our two largest customers, Wal-Mart and
Toys R Us, in the aggregate accounted for approximately 33% of net sales, and
our ten largest customers in the aggregate accounted for approximately 54% of
net sales. If some of these customers were to cease doing business with us, or
to significantly reduce the amount of their purchases from us, it could have a
material adverse effect on our business, financial condition and results of
operations.
The toy business is seasonal and therefore our annual operating results will
depend, in large part, on our sales during the relatively brief holiday season.
Sales of toy products at retail are seasonal, with a majority of retail
sales occurring during the period from September through December. This
seasonality is increasing as large toy retailers become more efficient in their
control of inventory levels through the just-in-time inventory management
systems. As a result, our annual operating results will depend, in large part,
on our sales during the relatively brief holiday season. This seasonal pattern
requires significant use of working capital mainly to manufacture inventory
during the year, prior to the holiday season, and requires accurate forecasting
of demand for products during the holiday season. Failure to accurately predict
and respond to consumer demand may have a material adverse effect on our
business, financial condition and results of operations.
16
Changes in our credit rating or the credit markets could increase the cost of
satisfying our long-term capital needs.
We expect to satisfy our future long-term capital needs in part through the
issuance of debt securities. For example, in 2000 we will be required to pay
back over $300 million of our currently outstanding debt securities and we
presently intend to issue new debt securities to raise the necessary funds. The
interest rate, selling price, initial offering discount or any premium offered
for our debt securities will be based on a number of factors, including:
. our ratings with major credit rating agencies;
. the prevailing interest rates being paid by other companies similar to
us; and
. the overall condition of the financial and credit markets at the time of
the initial distribution of the debt securities.
The condition of the credit markets and prevailing interest rates have
fluctuated in the past and are likely to fluctuate in the future. Fluctuations
in these factors could make it difficult for us to sell debt securities or
require us to offer higher interest rates in order to sell new debt securities.
In addition, credit rating agencies continually revise their ratings for the
companies that they follow, such as us. The credit rating agencies also
evaluate the consumer products or family entertainment industry as a whole and
may change their credit rating for us based on their overall view of our
industry. Recently, our credit rating was reduced by several credit rating
agencies and we cannot assure you that our credit rating will not continue to
be reduced. A negative change in our rating could make it more difficult for us
to sell our debt securities and require us to offer higher interest rates. If
we are required to offer higher interest rates in order to sell our new debt
securities, the increased interest costs could have an adverse effect on our
financial condition and results of operations.
Our sales and manufacturing operations outside the US subject us to risks
normally associated with international operations.
We own and operate manufacturing facilities and utilize third-party
manufacturers principally in China, Indonesia, Malaysia and Mexico. Such sales
and manufacturing operations are subject to the risks normally associated with
international operations, including:
. currency conversion risks and currency fluctuations;
. limitations, including taxes, on the repatriation of earnings;
. political instability, civil unrest and economic instability;
. greater difficulty enforcing intellectual property rights and weaker
laws protecting such rights;
. greater difficulty and expense in conducting business abroad;
. complications in complying with foreign laws and changes in governmental
policies;
. transportation delays and interruptions; and
. the imposition of tariffs.
These risks could negatively impact our international sales and
manufacturing operations, which could have a material adverse effect on our
business, financial condition and results of operations.
All foreign countries in which our products are manufactured currently enjoy
"normal trade relations" status under US tariff laws, which provides a
favorable category of US import duties. As a result of continuing concerns in
the US Congress regarding China's human rights policies, and disputes regarding
Chinese trade policies, including the country's inadequate protection of US
intellectual property rights, there has been, and
17
may be in the future, opposition to the annual extension of "normal trade
relations" status for China. The loss of "normal trade relations" status for
China would result in a substantial increase in the import duty of toys
manufactured in China and imported into the US and would result in increased
costs. Such increases in import duties and costs could have a material adverse
effect on our business, financial condition and results of operations.
We are dependent on our intellectual property rights and we cannot assure you
that we will be able to successfully protect such rights.
We rely on a combination of trade secret, copyright, trademark, patent and
other proprietary rights laws to protect our rights to valuable intellectual
property related to our brands. We also rely on license and other agreements to
establish ownership rights and to maintain confidentiality. We cannot assure
you that such intellectual property rights can be successfully asserted in the
future or will not be invalidated, circumvented or challenged. Technological
developments and the Internet may create new risks to our ability to protect
our intellectual property. In addition, laws of certain foreign countries in
which our products may be sold do not protect intellectual property rights to
the same extent as the laws of the US. The failure to protect our proprietary
information and any successful intellectual property challenges or infringement
proceedings against us could have a material adverse effect on our business,
financial condition and results of operations.
We have anti-takeover provisions in place that may make it more difficult for a
third party to acquire us without our consent, which may adversely effect our
stock price.
We have in place a stockholder rights plan which provides for the issuance
of preferred stock purchase rights designed to protect our stockholders from
abusive takeover tactics by causing substantial dilution to a person or group
that attempts to acquire 15% or more of our stock on terms not approved by our
board of directors. Additionally, our board of directors can, without obtaining
stockholder approval, issue shares of preferred stock having rights, including
the right to vote as a class on any proposed change of control, that could
adversely affect the voting power of holders of our common stock. Our charter
documents also contain additional provisions intended to reduce the risk of
abusive takeover tactics, including specifying procedures for director
nominations by stockholders and submission of other proposals by stockholders
at meetings, and restricting the ability of stockholders to call special
meetings. Certain agreements to which we are a party, including loan and
employment agreements and stock option plans, contain provisions that impose
increased costs upon us in the event of a change of control. Further, we are
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits us from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the person
becomes an interested stockholder unless approval is received in a prescribed
manner. The existence of these anti-takeover provisions may make it
substantially more difficult for a third party to acquire control of us or
accumulate large blocks of our common stock, which could adversely affect our
stock price.
18
Executive Officers of the Registrant
The current executive officers of Mattel, all of whom are appointed annually
by the board of directors and serve at the pleasure of the board, are as
follows:
Executive
Officer
Name Age Position Since
---- --- -------------------------------------- ---------
Ronald M. Loeb......... 67 Acting Chief Executive Officer and a
Director of Mattel, Inc. 2000
Pleasant T. Rowland.... 59 Vice Chairman of the Board of Mattel,
Inc. and President, Pleasant Company 1998
Matthew C. Bousquette.. 41 President, Boys/Entertainment 1999
Adrienne Fontanella.... 41 President, Girls/Barbie 1999
Neil B. Friedman....... 52 President, Fisher-Price Brands 1999
Bernard Stolar......... 53 President, Mattel Interactive 2000
Joseph C. Gandolfo..... 57 President, Worldwide Manufacturing
Operations and a Director of Mattel,
Inc. 1990
Ned Mansour............ 51 President, Mattel, Inc. and a Director
of Mattel, Inc. 1992
Kevin M. Farr.......... 42 Chief Financial Officer 1996
William Stavro......... 60 Senior Vice President and Treasurer 1993
Robert Normile......... 40 Senior Vice President, General Counsel
and Secretary 1999
Mr. Loeb has been acting Chief Executive Officer since February 2000 and a
member of the Board of Directors since 1970. He is currently Senior Vice
President and General Counsel of Williams-Sonoma, Inc., a consumer products
company. Mr. Loeb is a retired partner of the law firm of Irell & Manella LLP.
Ms. Rowland has been Vice Chairman of the Board of Mattel, Inc. and
President, Pleasant Company since July 1998. Ms. Rowland has been President of
Pleasant Company since 1986 when she founded that company.
Mr. Bousquette has been President, Boys/Entertainment since March 1999. From
May 1998 to March 1999, he was Executive Vice President and General Manager-
Boys Toys. From 1995 to 1998, he was General Manager. He joined Mattel in
December 1993 as Senior Vice President-Marketing for Activity Toys, and had
previously worked for Mattel from 1984 to 1988 in Boys Toys marketing.
Ms. Fontanella has been President, Girls/Barbie since March 1999. From
November 1998 to March 1999, she was General Manager and Senior Vice President-
Worldwide Barbie Licensing and Collectibles. From February to November 1998,
she was Senior Vice-President-Worldwide Barbie Licensing New Ventures. She
joined Mattel in May 1996 as Vice President. Prior to joining Mattel, she held
senior positions within the cosmetics industry, including chairman of January
Productions from 1995 to 1996.
Mr. Friedman has been President, Fisher-Price Brands since March 1999. From
August 1996 to March 1999, he was President-Tyco Preschool. For more than five
years prior to that time, he was President of MCA/Universal Merchandising,
Executive Vice President and Chief Operating Officer of Lionel Leisure, Inc.,
and President of Aviva/Hasbro.
Mr. Stolar has been President, Mattel Interactive since January 2000. From
July 1996 to August 1999, he served as President and Chief Operating Officer of
Sega of America, Inc., a consumer electronics company. From April 1994 until
July 1996, he was Executive Vice President of Sony Computers of America, a
consumer electronics company.
Mr. Gandolfo has been President, Worldwide Manufacturing Operations since
April 1990 and a member of the Board of Directors since May 1997.
19
Mr. Mansour has been President, Mattel, Inc. since June 1999 and a member of
the Board of Directors since August 1996. From August 1996 to June 1999, he was
President, Corporate Operations. He was General Counsel from November 1997
until April 1999. From April 1991, he served in several senior managerial
positions at Mattel, including President, Mattel-USA, Chief Administrative
Officer and Secretary.
Mr. Farr has been Chief Financial Officer since February 2000. From
September 1996 to February 2000, he was Senior Vice President and Corporate
Controller. From June 1993 to September 1996, he served as Vice President, Tax.
Prior to that he served as Senior Director, Taxes from August 1992 to June
1993.
Mr. Normile has been Senior Vice President, General Counsel and Secretary
since March 1999. He served as Vice President, Associate General Counsel and
Secretary from July 1998 to March 1999. From August 1994 to March 1999, he
served as Assistant General Counsel and Assistant Secretary. From June 1992 to
August 1994, he served as Assistant General Counsel. Prior to that, he was
associated with the law firms of Latham & Watkins and Sullivan & Cromwell.
Mr. Stavro has been Senior Vice President and Treasurer since May 1995. From
November 1993 to May 1995, he was Vice President & Treasurer. From March 1992
to November 1993, he was Vice President & Assistant Treasurer. Prior to that he
was Assistant Treasurer for more than five years.
Item 2. Properties
Mattel owns its corporate headquarters in El Segundo, California, consisting
of 335,000 square feet, which is subject to a $43.0 million mortgage, and an
adjacent 55,000 square foot office building. Mattel also leases buildings in El
Segundo consisting of approximately 250,000 square feet, which are primarily
used for its design and development and audio visual departments. Fisher-Price
owns its headquarters facilities in East Aurora, New York, consisting of
approximately 390,000 square feet. Pleasant Company owns its headquarters
facilities in Middleton, Wisconsin, consisting of approximately 395,000 square
feet.
Mattel maintains sales offices in California, Illinois, New York, North
Carolina and Texas, and warehouse and distribution facilities in California,
Kentucky and Texas. Mattel owns a computer facility in Phoenix, Arizona.
Internationally, Mattel has its principal offices and/or warehouse space in
Australia, Brazil, Canada, France, Germany, Hong Kong, Italy, Mexico, The
Netherlands, Spain, and the United Kingdom. Mattel's principal manufacturing
facilities are located in China, Indonesia, Italy, Malaysia, Mexico, Thailand
and the US. See "Manufacturing."
Most of Mattel's facilities are occupied under leases and, for the most
part, are fully utilized, although excess manufacturing capacity exists from
time to time based on product mix and demand. With respect to leases that are
scheduled to expire during the next twelve months, Mattel may negotiate new
lease agreements, renew leases or utilize alternative facilities. See Note 6 to
the Consolidated Financial Statements.
Item 3. Legal Proceedings
Power Wheels(R) Recall and Related Matters
On October 22, 1998, Mattel announced that Fisher-Price, in cooperation with
the Consumer Product Safety Commission, would conduct a voluntary recall
involving up to 10 million battery-powered Power Wheels(R) ride-on vehicles.
The recall did not result from any serious injury, and involves the replacement
of electronic components that may overheat, particularly when consumers make
alterations to the product. The recall involves vehicles sold nationwide since
1984 under nearly 100 model names. Additionally, Fisher-Price has been notified
by the Consumer Product Safety Commission that the Commission is considering
whether Fisher-Price may be subject to a fine for delayed reporting of the
facts underlying the recall.
In the third quarter of 1998, Mattel recognized a $38.0 million pre-tax
charge related to the recall. During the second and fourth quarters of 1999,
Mattel recognized additional pre-tax charges totaling $20.0 million related to
the recall.
20
Greenwald Litigation and Related Matters
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025
008) against Mattel in Superior Court of the State of California, County of Los
Angeles. Ms. Greenwald is a former employee whom Mattel terminated in July
1995. Her complaint sought $50 million in general and special damages, plus
punitive damages, for breach of oral, written and implied contract, wrongful
termination in violation of public policy and violation of California Labor
Code Section 970. Ms. Greenwald claimed that her termination resulted from
complaints she made to management concerning general allegations that Mattel
did not account properly for sales and certain costs associated with sales and
more specific allegations that Mattel failed to account properly for certain
royalty obligations to The Walt Disney Company. On December 5, 1996, Mattel's
motion for summary adjudication of Ms. Greenwald's public policy claim was
granted. On March 7, 1997, Mattel filed a motion for summary judgment on the
remaining causes of action. On December 9, 1997, Mattel's motion for summary
judgment of Ms. Greenwald's remaining claims was granted. On February 4, 1998,
Ms. Greenwald appealed from the dismissal of her suit. The appeal has been
fully briefed, and a hearing took place on March 3, 2000. Mattel intends to
continue to defend the action vigorously, including the appeal.
Toys R Us and Related Matters
On October 2, 1997, the Attorney General of the State of New York filed in
the United States District Court, Eastern District of New York (Case No. CV 97
5714), an action against Toys R Us, Mattel and certain other toy manufacturers
alleging that the defendants had violated federal antitrust laws and entered
into vertical and horizontal arrangements that had the effect of restricting
sales to the warehouse clubs. The attorneys general from forty-three other
states, the District of Columbia and the Commonwealth of Puerto Rico joined
this action. Following the filing of the New York action, a series of private
treble damage class actions under the federal antitrust laws were filed in
various federal district courts. The parties later agreed to have these related
actions transferred to the Eastern District of New York to be consolidated by
the Judicial Panel on Multiple Litigation before Nina Gershon, United States
District Judge. Private class actions were also filed in state courts in
Alabama, California, and New Jersey, asserting claims under state antitrust
law. These state court actions were coordinated with the federal court actions.
Subsequent mediation efforts resulted in a Settlement Agreement and Release
as to Mattel, Inc., Fisher-Price, and Tyco, effective April 6, 1999. Pursuant
to the terms of the Settlement Agreement and Release, Mattel agreed to make a
cash payment and a toy contribution, both of which were made in the fourth
quarter of 1999. As a result of a dispute between the parties as to the
selection of the toys to be contributed, Mattel negotiated a Supplemental Toy
Contribution Agreement and made a supplemental toy contribution in December
1999. Final Judgment and Order of Dismissal was entered by Judge Gershon on
February 17, 2000 that effectively dismissed with prejudice the claims asserted
by the state and private federal and state court plaintiffs, including the
claims of any person represented in either a parens patriae or private class
capacity.
Litigation Related to Business Combination
On December 16, 21, and 23, 1998, several stockholders of the legal entity
The Learning Company, Inc. that merged into Mattel ("Old Learning Company")
filed six separate purported class action complaints in the Court of Chancery
of the State of Delaware in and for New Castle County against Old Learning
Company and Old Learning Company's board of directors for alleged breaches of
fiduciary duties in connection with the May 1999 merger. The six complaints
were consolidated. The consolidated complaint named Mattel as an additional
defendant, claiming that Mattel aided and abetted the alleged breaches of
fiduciary duty. On March 9, 2000, the plaintiffs filed a notice and order of
dismissal dismissing the action without prejudice. Upon approval by the court,
the consolidated action will be formally dismissed.
21
Litigation Related to Learning Company Earnings Shortfall
Following Mattel's announcement on October 4, 1999 that it expected an
earnings shortfall at its Learning Company division in the third quarter of
1999, several of Mattel's shareholders filed purported class action complaints
in the United States District Court for the Central District of California, the
United States District Court for the Southern District of New York and the
United States District Court for Massachusetts naming Mattel and certain of its
officers and directors as defendants. The complaints generally allege, among
other things, that the defendants made false or misleading statements that
artificially inflated the price of Mattel's common stock by overstating the
revenues and net income of Mattel, including its Learning Company division, and
by falsely representing that the May 1999 Learning Company acquisition would be
immediately accretive to Mattel's 1999 and 2000 financial results.
Two of the purported class action complaints are brought on behalf of the
former stockholders of Broderbund Software, Inc. ("Broderbund") who acquired
shares of Old Learning Company in exchange for their Broderbund common stock in
connection with the Old Learning Company-Broderbund merger on August 31, 1998.
Mattel has been named as a defendant as the successor-in-interest to Old
Learning Company. The complaints generally allege that that the Old Learning
Company-Broderbund Registration Statement on Form S-4 filed on or about July
14, 1998 in connection with the merger was materially false.
On November 23, 1999, Mattel (along with other defendants named in the
federal securities lawsuits) filed a motion and brief before the Judicial Panel
on Multidistrict Litigation seeking to transfer all of the federal actions to
the United States District Court for the Central District of California for
Coordinated or Consolidated Pretrial Proceedings. On March 3, 2000, the
Judicial Panel on Multidistrict Litigation granted Mattel's motion.
In addition, a Mattel stockholder filed a derivative complaint on behalf and
for the benefit of Mattel in the Superior Court of the State of California,
County of Los Angeles. The complaint alleges 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 seeks both
monetary and injunctive relief. On February 10, 2000, the court sustained
defendants' demurrer and dismissed the complaint with leave to amend.
Mattel believes the lawsuits are without merit and intends to defend them
vigorously.
Environmental
Fisher-Price. Fisher-Price has executed a consent order with the State of
New York involving a remedial action/feasibility study for one of its
manufacturing plants. Currently, Fisher-Price is negotiating an additional
consent order which will outline the specific clean up strategy for the site.
Mattel anticipates that the New York State Department of Environmental Quality
will issue their Record of Decision in March 2000. The ultimate liability
associated with this cleanup presently is estimated to be less than $1,425,000,
approximately $1,030,500 of which has been incurred through December 31, 1999.
Beaverton, Oregon. Mattel operates a manufacturing facility on a leased
property in Beaverton, Oregon that was acquired as part of the Tyco merger. In
March 1998, samples of groundwater used by the facility for process water and
drinking water disclosed elevated levels of certain chemicals, including
trichloroethylene. Mattel immediately closed the water supply and self-reported
the sample results to the Oregon Department of Environmental Quality and the
Oregon Health Division. Mattel also implemented a community outreach program to
employees, former employees and surrounding landowners.
In November 1998, Mattel and another potentially responsible party entered
into a consent order with the Oregon Department of Environmental Quality to
conduct a remedial investigation/feasibility study at the property, to propose
an interim remedial action measure and to continue the community outreach
program. In the second quarter of 1999, Mattel recorded a $14.0 million pre-tax
charge for environmental remediation costs related to this property, based on
the completion and approval of the remediation plan and feasibility study.
22
General
Mattel is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and labor,
which Mattel is addressing or defending in the ordinary course of business.
Management believes that any liability which may potentially result upon
resolution of such matters will not have a material adverse effect on Mattel's
business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
23
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
For information regarding the markets in which Mattel's common stock, par
value $1.00 per share, is traded, see the cover page hereof. Information
regarding the high and low closing prices of the common stock for the last two
calendar years is incorporated herein by reference to the Consolidated
Financial Statements filed with this report. See Item 14 of Part IV.
As of March 6, 2000, Mattel had approximately 52,000 holders of record of
its common stock.
Mattel paid dividends on its common stock of $0.07 per share in January 1998
and $0.08 per share in April, July and October 1998 and January and April 1999.
Mattel paid dividends on its common stock of $0.09 per share in July and
October 1999. The payment of dividends on common stock is at the discretion of
Mattel's board of directors and is subject to customary limitations.
Item 6. Selected Financial Data
The following table sets forth for the periods indicated the selected
consolidated financial data for Mattel. This information should be read in
conjunction with the Consolidated Financial Statements included elsewhere
herein and in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected consolidated balance sheet
data as of December 31, 1997, 1996 and 1995 and the selected consolidated
financial data for the years ended December 31, 1996 and 1995 are derived from
audited Consolidated Financial Statements not included herein. The selected
consolidated financial data for the years ended December 31, 1999, 1998 and
1997 and as of December 31, 1999 and 1998 are derived from audited Consolidated
Financial Statements included elsewhere herein.
Selected Financial Data
For the Year Ended December 31(a)
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(In thousands, except per share and percentage
information)
Operating Results:
Net sales............... $5,514,950 $5,621,207 $5,455,547 $5,064,860 $4,708,452
Gross profit............ 2,601,040 2,913,303 2,819,660 2,590,078 2,292,309
% of net sales........ 47.2% 51.8% 51.7% 51.1% 48.7%
Operating profit(b)..... 40,866 520,100 113,828 315,827 614,541
% of net sales........ 0.7% 9.3% 2.1% 6.2% 13.1%
Income (loss) before
income taxes and
extraordinary item..... (110,743) 391,632 1,216 188,898 506,243
(Benefit) provision for
income taxes........... (28,370) 185,579 179,327 166,936 197,246
Income (loss) before
extraordinary item..... (82,373) 206,053 (178,111) 21,962 308,997
Extraordinary item--loss
on early retirement of
debt................... -- -- (4,610) -- --
Net income (loss)....... (82,373) 206,053 (182,721) 21,962 308,997
Income (Loss) Per Common
Share(c):
Income (loss) before
extraordinary item
Basic................. (0.21) 0.51 (0.51) 0.04 0.88
Diluted............... (0.21) 0.47 (0.51) 0.04 0.86
Net income (loss)
Basic................. (0.21) 0.51 (0.52) 0.04 0.88
Diluted............... (0.21) 0.47 (0.52) 0.04 0.86
Dividends Declared Per
Common Share(c)........ 0.35 0.31 0.27 0.24 0.19
24
As of Year End(a)
-----------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(In thousands)
Financial Position:
Cash and marketable
securities............. $ 275,024 $ 469,213 $ 883,903 $ 811,284 $ 715,440
Accounts receivable,
net.................... 1,270,005 1,150,051 1,253,343 1,033,066 926,626
Inventories............. 544,296 644,270 468,226 463,212 429,110
Total assets............ 5,127,022 5,147,385 4,512,843 4,607,008 4,394,801
Short-term borrowings... 369,549 199,006 52,618 53,924 76,443
Long-term liabilities... 1,346,811 1,333,548 1,110,722 1,121,350 1,266,079
Stockholders' equity.... 1,962,687 2,170,803 1,933,338 2,109,787 1,897,176
- --------
(a) Consolidated financial information for all periods presented has been
restated retroactively for the effects of the May 1999 merger with Learning
Company, accounted for as a pooling of interests. Consolidated financial
information for 1995-1997 has been restated retroactively for the effects
of the March 1997 merger with Tyco, accounted for as a pooling of
interests.
(b) Represents income from operations before interest expense and (benefit)
provision for income taxes.
(c) Per share data reflect the retroactive effect of stock splits distributed
to stockholders in March 1996 and January 1995, and the mergers with
Learning Company and Tyco in 1999 and 1997, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Summary
The following discussion should be read in conjunction with Mattel's
consolidated financial statements and notes thereto, and the information
included elsewhere herein. This discussion and the accompanying consolidated
financial statements and notes thereto have been prepared to reflect the
retroactive effect of Mattel's merger with Learning Company in May 1999. The
merger was accounted for as a pooling of interests, which means that for
accounting and financial reporting purposes and the discussion herein, the two
companies are treated as if they have always been combined.
Mattel designs, manufactures, and markets a broad variety of family products
on a worldwide basis through both sales to retailers 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
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 which have historically had
worldwide sustainable appeal. The recent acquisitions of Pleasant Company and
Learning Company are part of Mattel's strategic plan to better position itself
as a consumer products company that provides its core customers--children--with
products that meet their preferences in an increasingly interactive and
technology-driven world. The strategy has three components: first, Mattel is
communicating with consumers more directly. Second, Mattel is combining its
traditional and recently acquired brands with new technologies, including
software, electronic games, interactive toys and new media. Through its
integration of Learning Company and Mattel Media into the Mattel Interactive
division, Mattel has one of the leading consumer software operations in the
world. Mattel's joint venture with Intel is focused on producing high-
technology, interactive toys that appeal to increasingly technology-oriented
children and teenagers. Third, Mattel is implementing a "market by market"
approach to Mattel International. Mattel intends to grow its international
business by adapting products to local tastes, economic conditions and price
requirements.
Mattel's portfolio of brands can be grouped in the following categories:
. Girls--including Barbie(R) fashion dolls and accessories, collector
dolls, Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R) and
Polly Pocket(R)
. Infant and Preschool--including Fisher-Price(R), Disney preschool and
plush, Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna Doodle(R),
View-Master(R) and Blue's Clues(R)
25
. Wheels--including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing and
Tyco(R) Radio Control
. Entertainment--including Disney, Nickelodeon(R), games and puzzles
. Consumer Software--including Reader Rabbit(R), Carmen Sandiego(TM), The
Oregon Trail(R), Myst(R) and The Print Shop(R)
Results of Operations
The following is a percentage analysis of operating results for the past
three years:
For the Year
--------------------
1999 1998 1997
----- ----- -----
Net sales............................................ 100.0% 100.0% 100.0%
===== ===== =====
Gross profit......................................... 47.2% 51.8% 51.7%
Advertising and promotion expenses................... 17.2 16.3 15.5
Other selling and administrative expenses............ 21.6 20.3 18.6
Amortization of intangibles.......................... 1.7 2.3 8.9
Restructuring and other charges...................... 6.3 2.8 6.3
Charge for incomplete technology..................... -- 1.0 0.4
Other income, net.................................... (0.3) (0.2) (0.1)
----- ----- -----
Operating profit..................................... 0.7 9.3 2.1
Interest expense..................................... 2.7 2.3 2.1
----- ----- -----
Income (loss) before income taxes and extraordinary
item................................................ (2.0)% 7.0% -- %
===== ===== =====
1999 Compared to 1998
Consolidated Results
Net loss for 1999 was $82.4 million or $0.21 per diluted share as compared
to net income of $206.1 million or $0.47 per diluted share in 1998. The 1999
results were negatively impacted by restructuring and other charges totaling
$346.0 million, approximately $265 million after-tax or $0.64 per diluted
share, related to the Mattel restructuring plan, the merger and integration of
Learning Company, and other nonrecurring charges. See "Restructuring and Other
Charges." Additionally, Mattel's 1999 results were negatively impacted by the
results of operations of its Learning Company division, which reported a pre-
tax loss of $205.5 million for the full year 1999. The 1998 results of
operations were negatively impacted by nonrecurring charges, including an
incomplete technology write-off of $56.8 million related to the acquisition of
Mindscape, Inc. in March 1998, restructuring and other charges of $113.3
million related to 1998 acquisitions and one-time charges of $44.0 million in
connection with the voluntary recall of Power Wheels(R) ride-on vehicles and a
Toys R Us-related antitrust litigation settlement. Total 1998 nonrecurring
charges of approximately $163 million after-tax impacted the earnings by $0.39
per diluted share.
The negative results of the Learning Company division in 1999 were
attributable to a number of factors. In 1999, Learning Company experienced a
decrease in sales of CD-ROM products at retail and a higher proportion of sales
of relatively lower priced and lower margin products. During the second half of
1999, Learning Company was in the process of revising its distribution channel
arrangements. These changes in distribution terms combined with the general
weakness in the CD-ROM market resulted in increased product returns.
Significant price and promotional competition caused the Learning Company
division to incur higher than anticipated price concessions and marketing
expenses, including increased use of rebate programs, price protection and
advertising. In addition, increased bad debt reserves of approximately $56
million, including $35 million related to one of Learning Company's major
distributors, contributed to its operating loss.
26
In 2000, Mattel will attempt to improve the results of its Learning Company
division by reducing the number of software products it develops and sells,
decreasing the length of its software product development cycle and eliminating
a number of its lower margin software titles. In addition, Mattel has
implemented a more strict sales control policy with its distributors and
retailers and plans to decrease the use of rebates to consumers and price and
marketing concessions to distributors and retailers. Mattel intends to focus on
areas where potential growth opportunities exist, including expansion of its
interactive products to new platforms such as game consoles and the Internet,
as well as increased sales in the international markets. Mattel also plans to
continue its strategy of creating stand-alone on-line ventures utilizing
Learning Company assets, such as Genealogy.com, LLC and GoodHome, LLC, in which
Mattel retains an equity interest, and will consider strategic dispositions,
licensing agreements and other similar transactions. In 1999 and 2000, Mattel
replaced the senior management at its Learning Company division. There can be
no assurance that the Learning Company division's results will improve as a
result of Mattel's efforts.
Mattel is also currently undertaking a comprehensive review of its entire
interactive business to identify additional opportunities to improve operating
productivity and realize costs savings. Following this review, Mattel expects
to incur pre-tax reorganizational charges totaling approximately $75 million to
$100 million in the first quarter of 2000. These charges are designed to
streamline the infrastructure, product development cycle and operations of
Mattel Interactive.
Net sales for 1999 were $5.5 billion, a decrease of 2% from $5.6 billion in
1998. Sales to customers within the US remained relatively flat and accounted
for 72% and 71% of consolidated net sales in 1999 and 1998, respectively. Sales
to customers outside the US were down 6%, including an unfavorable foreign
exchange effect of approximately $22 million due to the generally stronger US
dollar relative to 1998. At comparable foreign exchange rates, sales
internationally declined by 4%, partially due to unfavorable industry-wide
trends, especially the shift amongst European retailers to just-in-time
inventory management. Mattel plans to grow its international business by
adapting products to local tastes, economic conditions and price requirements.
To accomplish this goal, Mattel continues to work on an extensive market-
specific strategy aimed at improving sales of its core product lines in
international markets. In addition, Mattel's September 1999 distribution
agreement with Bandai, the largest toy company in Japan, to distribute certain
Mattel products in Japan is also part of Mattel's strategy for international
growth and market penetration.
Sales in the Girls category decreased 3% largely due to declines in
Barbie(R) and Cabbage Patch Kids(R) products, partially offset by incremental
sales of American Girl(R) products resulting from the Pleasant Company
acquisition. Pleasant Company was acquired in July 1998 and therefore the
results of operations for 1998 only reflect six months of results. Sales in the
Infant and Preschool category declined 3%, largely attributable to last year's
success of Sesame Street(R) products, including "Tickle Me Elmo' and decreased
sales of Disney's Winnie the Pooh(R) products, partially offset by an increase
in sales of core Fisher-Price(R) and Power Wheels(R) products. Sales in the
Wheels category grew 6%, demonstrating continued strength in Hot Wheels(R),
Matchbox(R), and Tyco(R) Radio Control. Sales in the Entertainment category,
including Disney and Nickelodeon(R), increased 11% largely due to this year's
success of toys associated with Disney's feature motion picture "Toy Story II".
Sales of Learning Company consumer software products decreased 8%, mainly due
to a decrease in sales of CD-ROM products at retail and a higher proportion of
sales of relatively lower priced and lower margin products. This decrease was
partially offset by an increase in licensing revenues of approximately $50
million largely generated from licensing agreements, including Genealogy.com,
LLC in the third quarter of 1999 and GoodHome, LLC in the second quarter of
1999. Mattel views e-commerce and licensing transactions to be a significant
source of potential revenues for its Learning Company division and intends to
continue to attempt to leverage the value of its Internet properties through
joint ventures, licensing and other similar transactions.
Gross profit, as a percentage of net sales, was 47.2% in 1999, down from
51.8% in 1998, largely due to lower profit margins at Learning Company.
Excluding the Learning Company division, gross profit was 47.8% in 1999, down
1.6 percentage points from 1998 mainly due to overall change in product mix,
higher ocean freight costs and slightly higher product costs due to
strengthening currencies in countries where Mattel manufactures its products.
As a percentage of net sales, advertising and promotion expenses increased
nearly
27
one percentage point to 17.2% mainly as a result of higher rebates offered to
consumers on Learning Company products and increased marketing expenses
incurred to promote certain Learning Company titles. Excluding the Learning
Company division, advertising as a percentage of net sales was 15.4%, a
decrease of 1.6 percentage points over 1998. Other selling and administrative
expenses increased from 20.3% of net sales in 1998 to 21.6% of net sales in
1999, primarily due to increased Learning Company bad debt expense.
Amortization of intangibles decreased by $37.8 million, mainly as a result of
completed amortization of intangibles related to certain Learning Company's
acquisitions, partially offset by higher amortization resulting from 1998
acquisitions.
Interest expense increased $23.1 million, primarily due to increased short-
and long-term borrowings to fund Learning Company's cash requirements and to
finance Mattel's 1998 acquisitions.
Business Segment Results
Mattel's reportable segments are separately managed business units and
include Toy Marketing, Consumer Software and Operations. The Toy Marketing
segment is divided on a geographic basis between domestic and international.
The domestic Toy Marketing segment is further divided into USA Toys, US Fisher-
Price/Tyco Preschool and Other. USA Toys principally sells products in the
Girls, Entertainment and Wheels categories. US Fisher-Price/Tyco Preschool
principally sells products in the Infant and Preschool categories. The Other
segment principally sells specialty products in the Girls category. The
International Toy Marketing segment sells products in all toy categories. The
Consumer Software segment consists of educational, productivity and
entertainment software products developed and sold by Learning Company on a
worldwide basis. The Operations segment manufactures toy products, which are
sold to the Toy Marketing segments. Additional financial information regarding
Mattel's business segments can be found in Note 8 to the Consolidated Financial
Statements.
The USA Toys segment sales reached $2.2 billion, consistent with 1998. This
segment achieved these results through increased sales of Barbie(R),
Entertainment and Wheels products. The US Fisher-Price/Tyco Preschool segment
sales grew by 4% mainly due to increased sales of core Fisher-Price(R) and
Power Wheels(R) products, partially offset by lower sales of Tyco Preschool
products as a result of last year's success of Sesame Street(R) products,
including "Tickle Me Elmo'. Sales in the Other segment increased by 24% due to
incremental sales resulting from the July 1998 acquisition of Pleasant Company.
The International Toy Marketing segment sales decrease of 7% was partially
attributable to the unfavorable foreign exchange effect due to the generally
stronger US dollar relative to 1998 and unfavorable industry-wide trends,
especially the shift by European retailers to just-in-time inventory
management. Mattel expects this trend to continue worldwide. By brand, the
International Toy Marketing segment experienced lower sales of Barbie(R) and
Infant and Preschool products, partially offset by sales increases in Wheels
and Entertainment products. The Consumer Software segment sales decreased 8%,
mainly due to a decrease in sales of CD-ROM products at retail and a higher
proportion of sales of relatively lower priced and lower margin products.
Operating profit in the USA Toys and International Toy Marketing segments
declined by 7% and 28%, respectively. The decline in operating profit in each
of these segments was largely attributable to lower sales volume and
unfavorable shift in product mix, partially offset by lower advertising costs.
The US Fisher-Price/Tyco Preschool segment operating profit increased 8%,
largely due to a favorable shift in product mix and lower advertising and
overhead spending to support the Fisher-Price(R) product line. The Other
segment operating profit declined by 73%, largely due to incremental
amortization and overhead expenses resulting from the July 1998 acquisition of
Pleasant Company. The Consumer Software segment realized an operating loss of
$205.5 million in 1999 compared to a profit of $114.3 million in 1998. The
negative results of the Learning Company division in 1999 were attributable to
a number of factors. In 1999, Learning Company experienced a decrease in sales
of CD-ROM products at retail and a higher proportion of sales of relatively
lower priced and lower margin products. During the second half of 1999,
Learning Company was in the process of revising its distribution channel
arrangements. These changes in distribution terms combined with the general
weakness in the CD-ROM market resulted in increased product returns.
Significant price and promotional competition
28
caused Learning Company to incur higher than anticipated price concessions and
marketing expenses, including increased use of rebate programs, price
protection and advertising. In addition, increased bad debt reserves of
approximately $56 million, including $35 million related to one of Learning
Company's major distributors, contributed to its operating loss.
1998 Compared to 1997
Consolidated Results
Net income for 1998 was $206.1 million or $0.47 per diluted share as
compared to a loss of $182.7 million or $0.52 per diluted share in 1997.
Profitability for 1998 was negatively impacted by nonrecurring charges,
including an incomplete technology write-off of $56.8 million related to the
acquisition of Mindscape, Inc. in March 1998, restructuring and other charges
of $113.3 million related to 1998 acquisitions and one time charges of $44.0
million in connection with the voluntary recall of Power Wheels(R) ride-on
vehicles and a Toys R Us-related antitrust litigation settlement. Total 1998
nonrecurring charges of approximately $163 million after tax impacted earnings
by $0.39 per diluted share. Profitability for 1997 was impacted by
restructuring and other charges of $343.6 million related to the Mattel
restructuring plan, the merger and integration of Tyco, and other Learning
Company merger charges. The 1997 results also included an incomplete technology
write-off of $20.3 million related to products being developed by Creative
Wonders L.L.C., Parsons Technology Inc., and Living Books and an extraordinary
charge of $4.6 million after-tax for the early retirement of debt assumed as
part of the Tyco merger. Total 1997 nonrecurring charges of approximately
$286.2 million after-tax impacted earnings by $0.77 per diluted share.
Net sales for 1998 reached $5.6 billion, an increase of 3% from $5.5 billion
in 1997. Sales to customers within the US increased 6% and accounted for 71%
and 69% of consolidated net sales in 1998 and 1997, respectively. Sales to
customers outside the US were down 4%, including an unfavorable foreign
exchange effect due to the generally stronger US dollar relative to 1997.
Sales in the Girls category decreased 4% largely due to a 14% decline in
Barbie(R) products, as a result of high retail inventory levels entering 1998
and domestic toy retailers shift to a just-in-time buying pattern. As a result
of the Pleasant Company acquisition in July 1998, the American Girl(R) brand
contributed $213.2 million in sales, which helped to partially offset the
decline in Barbie(R). Sales in the Infant and Preschool category decreased 3%,
largely attributable to declines in Sesame Street(R) and Fisher-Price(R)
products, partially offset by an increase in Disney's Winnie the Pooh(R). Sales
in the Wheels category grew 21%, reflecting growth in both Hot Wheels(R) and
Matchbox(R) vehicles and playsets. Sales in the Entertainment category, which
includes Disney and Nickelodeon(R), increased 14% largely due to the 1998
introduction of toys associated with the feature motion pictures "A Bug's Life"
and "The Rugrats Movie". Sales of Learning Company consumer software products
increased 35%, mainly due to the acquisition of Mindscape, Inc. which added
$188.1 million to 1998 sales, introduction of new software titles such as The
ClueFinders(TM) 4th Grade Adventures, Arthur's(R) Computer Adventures, and
upgraded products.
Gross profit as a percentage of net sales remained relatively constant at
51.8% compared to 51.7% in 1997. As a percentage of net sales, advertising and
promotion expenses increased approximately one percentage point to 16.3%, and
selling and administrative expenses increased 1.7 percentage points to 20.3%.
Both ratios increased relative to 1997 as a result of unanticipated cutbacks in
buying by domestic toy retailers due to a continuing shift by these retailers
to just-in-time inventory management. To respond to such shifts, Mattel took
appropriate actions to adjust its own shipping to more of a just-in-time
pattern. As a result, toy products that would have previously been shipped in
December of 1998 were shipped closer to the time that they were purchased by
the consumer. Amortization of intangibles decreased by $357.5 million, mainly
as a result of completed amortization of intangibles related to certain
Learning Company's acquisitions, partially offset by amortization resulting
from the 1998 acquisitions of Pleasant Company, Sofsource, Inc., Bluebird Toys
PLC ("Bluebird") and Mindscape, Inc.
29
Interest expense increased $15.9 million primarily due to increased short-
and long-term borrowings to finance the 1998 acquisitions of Pleasant Company
and Bluebird, partially offset by the repurchase of certain of the 5 1/2%
Senior Notes of Learning Company.
Other income, net increased $8.3 million, mainly due to an $11.1 million
gain realized on sale of investments.
Business Segment Results
The USA Toys segment sales were down 5% in 1998 compared to 1997, largely
due to lower sales of Barbie(R) products, as a result of high retail inventory
levels entering 1998 and domestic toy retailers shift to a just-in-time buying
pattern. This decrease was partially offset by increased sales of Wheels and
Entertainment products. The US Fisher-Price/Tyco Preschool segment sales
declined by 13% due to decreased sales of Sesame Street(R) and Fisher-Price(R)
products. Sales in the Other segment increased to $256.1 million in 1998 from
$58.3 million in 1997 due to American Girl(R) sales generated from the July
1998 acquisition of Pleasant Company. The International Toy Marketing segment
sales decreased 1% due to lower sales of Barbie(R) products, partially offset
by stronger sales of Wheels and Infant/Preschool products. Consumer Software
segment sales increased 35%, mainly due to the acquisition of Mindscape, Inc.
which added $188.1 million to 1998 net sales, introduction of new software
titles such as The ClueFinders(TM) 4th Grade Adventures and Arthur's(R)
Computer Adventures, and upgraded products.
Operating profit in the USA Toys and International Toys Marketing segments
declined by 27% and 29%, respectively. The decline in operating profit in each
of these segments was largely attributable to lower sales volume and
unfavorable shift in product mix. The US Fisher-Price/Tyco Preschool segment
operating profit increased 11%, driven by improved profitability in the Fisher-
Price(R) product line, partially offset by unfavorable shift in product mix of
Tyco Preschool products. The Other segment operating profit increased to $20.2
million in 1998 from $7.3 million in 1997 mainly due to the July 1998
acquisition of Pleasant Company. The Consumer Software segment realized profit
of $114.3 million in 1998 compared to a loss of $312.5 million in 1997, largely
due to increased sales and lower amortization.
Income Taxes
The effective income tax rate for 1999 was 25.6%, favorably impacted by
domestic losses incurred by Learning Company, and by income earned in foreign
jurisdictions taxed at lower rates. This represents a substantial reduction
from 1998 and 1997, during which the effective income tax rates were in excess
of the US federal tax rate of 35%. The reduction in the tax rate is the result
of a decrease in the amount of non-deductible items, particularly the write-off
of incomplete technology and other non-deductible expenses incurred in
connection with business acquisitions, that unfavorably impacted the 1998 and
1997 tax rates.
Pre-tax losses from US operations as a percentage of the consolidated pre-
tax income was less than the sales to US customers as a percentage of the
consolidated gross sales. This difference results from operating losses,
amortization of intangibles and corporate headquarters expenses incurred in the
US that decreased US pre-tax income, and foreign profits related to sales
ultimately made to US customers.
Financial Position
Mattel's cash position was $275.0 million, compared to $469.2 million as of
the end of 1998. Cash decreased $194.2 million primarily due to the payment of
restructuring and integration costs related to the Learning Company merger,
repayment of Learning Company's credit lines and the termination of Learning
Company's receivable factoring facilities. Accounts receivable, net increased
by $120.0 million to $1,270.0 million at year end 1999 principally due to the
cancellation of Learning Company's receivable factoring facilities. Inventories
decreased by $100.0 million to $544.3 million at year end 1999, reflecting
Mattel's shift to just-in-time production and shipping programs, partially
offset by higher Learning Company
30
inventory. Prepaid expenses and other current assets decreased by $41.1 million
to $330.7 million at year end 1999, primarily due to the reclassification of
certain deferred income tax assets related to operating losses to noncurrent
assets, partially offset by higher prepaid royalties and software development
costs. Property, plant and equipment, net decreased $13.6 million to $749.5
million at year end 1999 largely due to asset writedowns related to the 1999
restructuring. Intangibles, net decreased $91.3 million to nearly $1.4 billion
at year end 1999, mainly due to goodwill amortization. Other noncurrent assets
increased by $299.9 million to $564.2 million at year end 1999, principally due
to increased noncurrent deferred tax assets related to operating losses.
Short-term borrowings increased $170.5 million compared to 1998 year end,
primarily due to the funding of Learning Company's cash requirements.
A summary of Mattel's capitalization is as follows:
As of Year End
-------------------------------
1999 1998
------------ ------------
(In millions, except
percentage information)
Senior notes................................. $ 601.0 18% $ 601.0 17%
Medium-term notes............................ 540.5 17 540.5 16
Other long-term debt obligations............. 42.4 1 43.0 1
-------- --- -------- ---
Total long-term debt......................... 1,183.9 36 1,184.5 34
Other long-term liabilities.................. 162.9 5 149.1 4
Stockholders' equity......................... 1,962.7 59 2,170.8 62
-------- --- -------- ---
$3,309.5 100% $3,504.4 100%
======== === ======== ===
Total long-term debt remained approximately the same at year end 1999
compared to year end 1998. Although $301.0 million of the senior notes are
maturing in 2000, they have been classified as long term in the consolidated
balance sheet at December 31, 1999 since management has the ability and intent
to repay these obligations upon maturity with proceeds from the issuance of
other long-term debt instruments. Despite the recent rating agency downgrades
of Mattel's long-term debt, Mattel's long-term debt rating continues to be
investment grade and the downgrades are not expected to impact Mattel's ability
to access the capital markets to implement the refinancing. However, the rating
agency downgrades will have a negative impact on the pricing spread over the
Treasury rates and could cause Mattel to pay a slightly higher interest rate on
the issued debt than it otherwise would have paid. See Item 1 "Risk Factors."
Mattel expects to satisfy its future long-term capital needs through the
retention of corporate earnings and the issuance of long-term debt instruments.
In November 1998, Mattel filed its current universal shelf registration
statement allowing it to issue up to $400.0 million of debt and equity
securities, all of which was available to be issued as of December 31, 1999.
Stockholders' equity of $2.0 billion at year end 1999 decreased $208.1 million
from year end 1998, primarily due to dividend declarations on common and
preferred stock, Mattel's net loss position due to restructuring and other
nonrecurring charges, treasury stock purchases and unfavorable effect of
currency translation adjustments, partially offset by cash received from
exercise of employee stock options.
Liquidity and Capital Resources
Mattel's primary sources of liquidity over the last three years have been
cash on hand at the beginning of the year, cash flows generated from
operations, long-term debt issuances and short-term seasonal borrowings.
Operating activities generated cash flows of $58.6 million during 1999,
compared to $571.7 million in 1998 and $503.4 million in 1997. The decrease in
cash flows from operating activities in 1999 is largely due to the negative
impact of Learning Company's results.
Mattel invested its cash flows during the last three years mainly in the
acquisitions of Pleasant Company, Sofsource, Inc., Bluebird and Mindscape,
Inc., additions to tooling in support of new products, and construction of new
manufacturing facilities.
31
Mattel received cash flows from its short-term borrowings, which was
primarily used to support operating activities. Mattel also received cash flows
from the issuance of Senior Notes in 1998, and Medium-Term Notes and Softkey
warrants in 1998 and 1997. Cash received from these debt issuances was used to
fund the 1998 acquisitions of Pleasant Company, Mindscape, Inc. and Bluebird,
to retire higher-cost debt and to support operating activities. In 1999, Mattel
repaid $30.0 million of its Medium-Term Notes. In 1998, Mattel repaid the long-
term debt and mortgage note assumed as part of the Pleasant Company
acquisition. In 1997, Mattel redeemed the 10 1/8% Notes assumed as part of the
acquisition of Tyco and repaid its 6 7/8% Senior Notes upon maturity. Cash was
also spent during the last three years to purchase treasury stock to provide
shares for issuance under Mattel's employee stock option plans and the exercise
of outstanding warrants. In addition, over the last three years, Mattel has
consistently increased cash payments for dividends on its common stock. The
payment of any dividends in the future is at the discretion of Mattel's board
of directors.
Seasonal Financing
Mattel expects to finance its seasonal working capital requirements for the
coming year by using existing and internally generated cash, issuing commercial
paper and selling certain trade receivables under its commited revolving credit
facility and using various short-term bank lines of credit. Mattel's domestic
committed unsecured credit facility provides up to a total of $1.0 billion in
short-term borrowings from a commercial bank group. This facility provides for
up to $700.0 million in advances and backup for commercial paper issuances, and
up to an additional $300.0 million for nonrecourse purchases of certain trade
accounts receivable by the bank group over the next three years. Under its
domestic credit facility, Mattel is required to meet financial covenants for
consolidated debt-to-capital and interest coverage. Currently Mattel is in
compliance with such covenants.
Mattel is currently in the process of negotiating a 364 day, $400 million
companion facility to its existing $1.0 billion credit facility, with
essentially the same group of commercial banks. The terms and conditions of the
companion facility will be similar to the existing $1.0 billion credit
facility. Mattel expects to have the companion facility in place by the end of
April 2000.
Mattel also expects to have approximately $370 million of individual short-
term foreign credit lines with a number of banks available in 2000, which will
be used as needed to finance seasonal working capital requirements of certain
foreign affiliates.
Business Combinations
Mattel and Learning Company completed the following business combinations
during the last three years. Each transaction has been accounted for as a
pooling of interests, which means the companies involved in the transaction are
treated as if they had always been combined for accounting and financial
reporting purposes.
In May 1999, Mattel completed its merger with Leaning Company, after which
Learning Company was merged with and into Mattel, with Mattel being the
surviving corporation. Each share of Learning Company Series A Preferred Stock
was then converted into 20 shares of Learning Company common stock immediately
prior to the consummation of the merger. Pursuant to the merger agreement, each
outstanding share of Learning Company common stock was converted into 1.2
shares of Mattel common stock upon consummation of the merger. As a result,
approximately 126 million Mattel common shares were issued in exchange for all
shares of Learning Company common stock outstanding as of the merger date. The
outstanding share of Learning Company special voting stock was converted into
one share of Mattel Special Voting Preferred Stock. Each outstanding
exchangeable share of Learning Company's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but upon consummation of the merger became
exchangeable for 1.2 shares of Mattel common stock.
In August 1998, Learning Company completed its merger with Broderbund, a
publisher and developer of consumer software for the home and school market.
Under the merger agreement, each outstanding share of
32
Broderbund common stock was converted into 0.80 shares of Learning Company
common stock and resulted in the issuance of approximately 17 million shares of
Learning Company common stock.
In March 1997, Mattel completed its merger with Tyco. Under the merger
agreement, each Tyco common stockholder received 0.48876 shares of Mattel
common stock for each share of Tyco common stock outstanding, which resulted in
the issuance of approximately 17 million Mattel common shares. Tyco restricted
stock units and stock options outstanding as of the merger date were exchanged
for approximately 0.6 million Mattel common shares. In addition, each share of
Tyco Series B and Series C preferred stock was converted into like Mattel
preferred stock.
Learning Company also merged with Palladium Interactive, Inc. and P.F.
Magic, Inc. in 1998 and TEC Direct, Inc., Microsystems Software, Inc., Skills
Bank Corporation and Learning Company Services, Inc. in 1997, each of which
were accounted for as poolings of interests. The consolidated financial
statements have not been retroactively restated for the results of operations
and financial position of these companies as the effect of each acquisition
individually and in the aggregate on Learning Company's balance sheet and
results of operations was less than three percent.
Acquisitions
Mattel and Learning Company acquired the following companies during the
years ended December 31, 1998 and 1997. Each of these acquisitions was
accounted for using the purchase method of accounting. The results of
operations of the acquired companies have been included in Mattel's
consolidated financial statements from their respective dates of acquisition.
Intercompany accounts and transactions between the acquired companies and
Mattel, as applicable, have been eliminated.
Method of (Assets)/Liabilities Incomplete
Month Price Payment Assumed Intangibles Technology
------- ------ ---------- -------------------- ----------- ----------
(In millions)
1998
Pleasant Company........ July $715.0 Cash $(25.0) $690.0 $ --
Bluebird Toys PLC....... June 80.0 Cash (20.0) 60.0 --
Sofsource, Inc. ........ June 45.0 Stock 6.7 36.8 14.9
Mindscape, Inc. ........ March 152.6 Cash/stock 6.4 119.0 40.0
1997
Creative Wonders,
L.L.C. ................ October $ 37.8 Cash $ 7.3 $ 44.0 $ 1.1
Parsons Technology...... August 31.0 Cash (11.7) 9.3 10.0
The acquisition price includes investment advisor and other directly-related
expenses, as applicable. The portion of the purchase price allocated to
incomplete technology was charged to expense in the year of acquisition.
Mattel also made other minor acquisitions during the last three years which
were accounted for using the purchase method. These acquisitions resulted in
the issuance of 0.4 million shares of common stock in the year ended December
31, 1997.
New Venture
In the third quarter of 1999, Mattel executed stock purchase and
distribution agreements with Bandai, the largest toy company in Japan. In the
purchase agreement, Mattel acquired approximately five percent of the
outstanding common stock of Bandai. The distribution agreements allow Bandai to
distribute certain Mattel products in Japan, while Mattel was granted the right
to distribute certain Bandai products in Latin America. Mattel and Bandai will
discuss other distribution opportunities in the U.S. on a case-by-case basis.
33
Restructuring and Other Charges
In 1999 Mattel incurred restructuring and other nonrecurring charges
totaling $346.0 million, approximately $265 million after-tax or $0.64 per
diluted share.
During the first quarter of 1999, Mattel incurred a nonrecurring pre-tax
charge of $3.9 million, largely related to the restructuring and integration of
acquisitions made by its Learning Company division in the fourth quarter of
1998.
During the second quarter of 1999, Mattel completed its merger with Learning
Company and finalized a previously announced plan of restructuring and
integration. These actions, along with other one-time events, resulted in a
nonrecurring pre-tax charge against operations of $345.0 million. In the fourth
quarter of 1999, Mattel incurred an additional $23.5 million charge relating to
its restructuring and integration plan and other one-time charges which had
previously not met the requirement for accrual. In addition, Mattel reversed
$26.4 million of the second quarter charge based on lower than anticipated
costs and revisions to previous estimates. The impact of these new developments
combined with the initial second quarter charge resulted in a full year
nonrecurring charge of $342.1 million. Of the pre-tax restructuring and
integration charges totaling $307.0 million, approximately $132 million was
spent in 1999, $111 million is expected to be spent in 2000 and the remaining
$64 million represents non-cash charges. Total cash outlay is expected to be
funded from existing cash balances and internally generated cash flows from
operations.
The restructuring and integration plan, expected to be substantially
complete by June 2000, provides for the consolidation and realignment of
Mattel's operations. The plan was aimed at leveraging global resources in areas
of manufacturing, marketing and distribution, eliminating duplicative functions
worldwide and achieving improved operating efficiencies. The plan, which was
designed to reduce product costs and overhead spending and recognize synergy
savings, resulted in actual cost savings of approximately $40 million in 1999.
Mattel expects savings of approximately $350 million over the next three years.
The realized cost savings for 1999 and beyond is lower than the previously
estimated savings of approximately $50 million and $400 million, respectively,
largely due to not realizing the revenue synergies with Learning Company. These
savings are net of anticipated incremental integration related spending of
approximately $12 million. This incremental spending includes approximately $3
million for capital investment at existing manufacturing facilities as well as
network consolidation, and charges for the relocation of employees and movement
of equipment, employee transition/training, and manufacturing start-up costs.
The following are the major restructuring and integration initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of three higher cost manufacturing facilities.
34
Components of the restructuring and other nonrecurring charges, including
related adjustments, are as follows:
Adjustments Balance
----------------- Total Amounts Dec. 31,
Plan (Credits) Charges Charges Incurred 1999
---- --------- ------- ------- -------- --------
(In millions)
Severance and other
compensation.................. $108 $(13) $18 $113 $ (30) $ 83
Distributor, license and other
contract terminations......... 57 (2) -- 55 (45) 10
Writedown of assets............ 42 (2) -- 40 (40) --
Lease termination costs........ 22 (4) -- 18 -- 18
---- ---- --- ---- ----- ----
Total restructuring costs and
asset writedowns............ 229 (21) 18 226 (115) 111
Merger-related transaction and
other costs................... 86 (5) -- 81 (76) 5
Other nonrecurring charges..... 30 -- 5 35 (16) 19
---- ---- --- ---- ----- ----
Total restructuring, asset
writedowns and other
charges..................... $345 $(26) $23 $342 $(207) $135
==== ==== === ==== ===== ====
In the fourth quarter of 1999, Mattel adjusted its restructuring and
integration plan and other nonrecurring charges, resulting in a net reduction
of approximately $3 million. The credits to the restructuring plan of
approximately $26 million were mainly due to Mattel's recent decision not to
close certain of its marketing offices and one of its manufacturing facilities.
The remaining credits include other changes in estimates and lower than
anticipated costs compared to the previous estimates for completed components
of the plan. Approximately 900 employees will not be terminated as a result
these changes.
The fourth quarter restructuring charge of approximately $18 million relates
to the termination of an additional 150 Learning Company employees at its
domestic offices. This action was taken to further consolidate the operations
of Learning Company's domestic offices. The fourth quarter other nonrecurring
charge relates to a $4.0 million increase to the reserve for the October 1998
recall of Mattel's Power Wheels(R) vehicles and a $1.1 million additional
charge related to the Toys R Us-related antitrust litigation settlement.
A description of the components of the restructuring and other nonrecurring
charges is as follows:
Severance and other compensation costs relate to the termination of
approximately 3,300 employees around the world. Approximately 2,300 of these
employees are hourly workers located in certain of Mattel's manufacturing
facilities, of which approximately 2,200 were employed in the manufacturing
facility in Kuala Lumpur, which ceased operations in September 1999. The
remainder of the work force reductions consists of downsizing sales and
marketing groups in the US, Europe and Asia-Pacific regions as well as the
elimination of duplicate administrative personnel following the consolidation
of back-office functions, the majority of which are in Europe. As of December
31, 1999, approximately $30 million had been paid to nearly 2,700 terminated
employees. Cash severance payments will extend beyond the completion of the
workforce reductions due to the severance payment options available to affected
employees.
Mattel terminated its sponsorship agreements related to certain attractions
for a total cost of $37.5 million, inclusive of the writeoff of related
capitalized costs. The cash portion of this charge was paid as of July 1999.
Mattel also recognized a $17.5 million charge, mainly related to settlements
for termination of certain foreign distributor agreements in conjunction with
the realignment of its sales and distribution network.
Mattel's restructuring plan resulted in the impairment of certain long-lived
assets related to the operations being closed. The sum of the undiscounted
future cash flows of these assets was not sufficient to cover the carrying
amount of these assets. As a result, these long-lived assets were written down
to fair market value and will be depreciated over their remaining useful lives.
Fair value of the impaired assets was determined by either third-party
appraisals or past experience in disposing of similar assets. Buildings and, to
the extent possible, equipment will be sold while the remainder of the impaired
assets will be abandoned when taken out of service.
35
Nearly all of the revenue-generating activities related to these assets will
continue as a result of more effective utilization of other assets. A
significant portion of the fixed asset writedowns is concentrated in the
Operations and Learning Company segments. In addition, other asset writeoffs
include approximately $10 million of goodwill related to a recently acquired
software business, which was closed following the merger with Learning Company.
Lease termination costs include penalties imposed upon canceling existing
leases and future obligations under long-term rental agreements at facilities
being vacated following the merger and realignment.
Merger-related transaction costs consist of investment banking fees, legal,
accounting and printing costs, registration fees and other costs recognized in
connection with the merger. Also included in this amount are the contractual
change of control payments arising from the merger. The majority of all merger-
related transaction costs were paid during the second quarter of 1999.
Other nonrecurring charges principally include an additional $20.0 million
related to the October 1998 recall of Mattel's Power Wheels vehicles and $14.0
million for environmental remediation costs related to a manufacturing facility
on a leased property in Beaverton, Oregon, based on the completion and approval
of the remediation plan and feasibility study.
Mattel is currently undertaking a comprehensive review of its entire
interactive business to identify additional opportunities to improve operating
productivity and realize costs savings. Following this review, Mattel expects
to incur pre-tax reorganizational charges totaling approximately $75 million to
$100 million in the first quarter of 2000. These charges are designed to
streamline the infrastructure, product development cycle and operations of
Mattel Interactive. Additionally, compensation expense of approximately $50
million, including forgiveness of certain executive loans, will be incurred in
the first quarter of 2000 related to the recent departure of certain senior
executives.
Litigation
Power Wheels(R) Recall and Related Matters
On October 22, 1998, Mattel announced that Fisher-Price, in cooperation with
the Consumer Product Safety Commission, would conduct a voluntary recall
involving up to 10 million battery-powered Power Wheels(R) ride-on vehicles.
The recall did not result from any serious injury, and involves the replacement
of electronic components that may overheat, particularly when consumers make
alterations to the product. The recall involves vehicles sold nationwide since
1984 under nearly 100 model names. Additionally, Fisher-Price has been notified
by the Consumer Product Safety Commission that the Commission is considering
whether Fisher-Price may be subject to a fine for delayed reporting of the
facts underlying the recall.
In the third quarter of 1998, Mattel recognized a $38.0 million pre-tax
charge related to the recall. During the second and fourth quarters of 1999,
Mattel recognized additional pre-tax charges totaling $20.0 million related to
the recall.
Greenwald Litigation and Related Matters
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025
008) against Mattel in Superior Court of the State of California, County of Los
Angeles. Ms. Greenwald is a former employee whom Mattel terminated in July
1995. Her complaint sought $50 million in general and special damages, plus
punitive damages, for breach of oral, written and implied contract, wrongful
termination in violation of public policy and violation of California Labor
Code Section 970. Ms. Greenwald claimed that her termination resulted from
complaints she made to management concerning general allegations that Mattel
did not account properly for sales and certain costs associated with sales and
more specific allegations that Mattel failed to account properly for certain
royalty obligations to The Walt Disney Company. On December 5, 1996, Mattel's
motion for summary adjudication of Ms. Greenwald's public policy claim was
granted. On March 7, 1997, Mattel filed a motion for summary judgment on the
remaining causes of action. On December 9, 1997, Mattel's motion for summary
judgment of Ms. Greenwald's remaining claims was granted. On February 4, 1998,
Ms. Greenwald
36
appealed from the dismissal of her suit. The appeal has been fully briefed, and
a hearing took place on March 3, 2000. Mattel intends to continue to defend the
action vigorously, including the appeal.
Toys R Us and Related Matters
On October 2, 1997, the Attorney General of the State of New York filed in
the United States District Court, Eastern District of New York (Case No. CV 97
5714), an action against Toys R Us, Mattel and certain other toy manufacturers
alleging that the defendants had violated federal antitrust laws and entered
into vertical and horizontal arrangements that had the effect of restricting
sales to the warehouse clubs. The attorneys general from forty-three other
states, the District of Columbia and the Commonwealth of Puerto Rico joined
this action. Following the filing of the New York action, a series of private
treble damage class actions under the federal antitrust laws were filed in
various federal district courts. The parties later agreed to have these related
actions transferred to the Eastern District of New York to be consolidated by
the Judicial Panel on Multiple Litigation before Nina Gershon, United States
District Judge. Private class actions were also filed in state courts in
Alabama, California, and New Jersey, asserting claims under state antitrust
law. These state court actions were coordinated with the federal court actions.
Subsequent mediation efforts resulted in a Settlement Agreement and Release
as to Mattel, Inc., Fisher-Price, and Tyco, effective April 6, 1999. Pursuant
to the terms of the Settlement Agreement and Release, Mattel agreed to make a
cash payment and a toy contribution, both of which were made in the fourth
quarter of 1999. As a result of a dispute between the parties as to the
selection of the toys to be contributed, Mattel negotiated a Supplemental Toy
Contribution Agreement and made a supplemental toy contribution in December
1999. Final Judgment and Order of Dismissal was entered by Judge Gershon on
February 17, 2000 that effectively dismissed with prejudice the claims asserted
by the state and private federal and state court plaintiffs, including the
claims of any person represented in either a parens patriae or private class
capacity.
Litigation Related to Business Combination
On December 16, 21, and 23, 1998, several stockholders of the legal entity
The Learning Company, Inc. that merged into Mattel ("Old Learning Company")
filed six separate purported class action complaints in the Court of Chancery
of the State of Delaware in and for New Castle County against Old Learning
Company and Old Learning Company's board of directors for alleged breaches of
fiduciary duties in connection with the May 1999 merger. The six complaints
were consolidated. The consolidated complaint named Mattel as an additional
defendant, claiming that Mattel aided and abetted the alleged breaches of
fiduciary duty. On March 9, 2000, the plaintiffs filed a notice and order of
dismissal dismissing the action without prejudice. Upon approval by the court,
the consolidated action will be formally dismissed.
Litigation Related to Learning Company Earnings Shortfall
Following Mattel's announcement on October 4, 1999 that it expected an
earnings shortfall at its Learning Company division in the third quarter of
1999, several of Mattel's shareholders filed purported class action complaints
in the United States District Court for the Central District of California, the
United States District Court for the Southern District of New York and the
United States District Court for Massachusetts naming Mattel and certain of its
officers and directors as defendants. The complaints generally allege, among
other things, that the defendants made false or misleading statements that
artificially inflated the price of Mattel's common stock by overstating the
revenues and net income of Mattel, including its Learning Company division, and
by falsely representing that the May 1999 Learning Company acquisition would be
immediately accretive to Mattel's 1999 and 2000 financial results.
37
Two of the purported class action complaints are brought on behalf of the
former stockholders of Broderbund who acquired shares of Old Learning Company
in exchange for their Broderbund common stock in connection with the Old
Learning Company-Broderbund merger on August 31, 1998. Mattel has been named as
a defendant as the successor-in-interest to Old Learning Company. The
complaints generally allege that that the Old Learning Company-Broderbund
Registration Statement on Form S-4 filed on or about July 14, 1998 in
connection with the merger was materially false.
On November 23, 1999, Mattel (along with other defendants named in the
federal securities lawsuits) filed a motion and brief before the Judicial Panel
on Multidistrict Litigation seeking to transfer all of the federal actions to
the United States District Court for the Central District of California for
Coordinated or Consolidated Pretrial Proceedings. On March 3, 2000, the
Judicial Panel on Multidistrict Litigation granted Mattel's motion.
In addition, a Mattel stockholder filed a derivative complaint on behalf and
for the benefit of Mattel in the Superior Court of the State of California,
County of Los Angeles. The complaint alleges 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 seeks both
monetary and injunctive relief. On February 10, 2000, the court sustained
defendants' demurrer and dismissed the complaint with leave to amend.
Mattel believes the lawsuits are without merit and intends to defend them
vigorously.
Environmental
Fisher-Price. Fisher-Price has executed a consent order with the State of
New York involving a remedial action/feasibility study for one of its
manufacturing plants. Currently, Fisher-Price is negotiating an additional
consent order which will outline the specific clean up strategy for the site.
Mattel anticipates that the New York State Department of Environmental Quality
will issue their Record of Decision in March 2000. The ultimate liability
associated with this cleanup presently is estimated to be less than $1,425,000,
approximately $1,030,500 of which has been incurred through December 31, 1999.
Beaverton, Oregon. Mattel operates a manufacturing facility on a leased
property in Beaverton, Oregon that was acquired as part of the Tyco merger. In
March 1998, samples of groundwater used by the facility for process water and
drinking water disclosed elevated levels of certain chemicals, including
trichloroethylene. Mattel immediately closed the water supply and self-reported
the sample results to the Oregon Department of Environmental Quality and the
Oregon Health Division. Mattel also implemented a community outreach program to
employees, former employees and surrounding landowners.
In November 1998, Mattel and another potentially responsible party entered
into a consent order with the Oregon Department of Environmental Quality to
conduct a remedial investigation/feasibility study at the property, to propose
an interim remedial action measure and to continue the community outreach
program. In the second quarter of 1999, Mattel recorded a $14.0 million pre-tax
charge for environmental remediation costs related to this property, based on
the completion and approval of the remediation plan and feasibility study.
General
Mattel is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and labor,
which Mattel is addressing or defending in the ordinary course of business.
Management believes that any liability which may potentially result upon
resolution of such matters will not have a material adverse effect on Mattel's
business, financial condition or results of operations.
Commitments
In the normal course of business, Mattel enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect Mattel's right to create and
market certain products. These arrangements include commitments for future
inventory purchases and royalty
38
payments. Certain of these commitments routinely contain provisions for
guaranteed or minimum expenditures during the term of the contracts.
As of December 31, 1999, the Operations segment had outstanding commitments
for 2000 purchases of inventory of approximately $92 million. Licensing and
similar agreements with terms extending through the year 2007 contain
provisions for future guaranteed minimum payments aggregating approximately
$346 million.
Foreign Currency Risk
Mattel's results of operations and cash flows can be impacted by exchange
rate fluctuations. To limit the exposure associated with exchange rate
movements, Mattel enters into foreign currency forward exchange and option
contracts primarily to hedge its purchase of inventory, sales and other
intercompany transactions denominated in foreign currencies. Mattel's results
of operations can also be affected by the translation of foreign revenues and
earnings into US dollars.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. 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 foreign borrowings and intercompany
invoicing. Mattel does not trade in financial instruments for speculative
purposes.
Mattel's foreign currency forward exchange contracts that were used to hedge
firm foreign currency commitments as of December 31, 1999 and 1998 are shown in
the following table.
These contracts generally mature within 18 months from the date of
execution. Contracts outstanding at year-end mature during the next 13 months.
All contracts are against the US dollar and are maintained by reporting units
with a US dollar functional currency, with the exception of the Indonesian
rupiah contracts that are maintained by an entity with a rupiah functional
currency.
39
For the purchase of foreign currencies, fair value reflects the amount,
based on dealer quotes, that Mattel would pay at maturity for contracts
involving the same currencies and maturity dates, if they had been entered into
as of year-end 1999 and 1998. For the sale of foreign currencies, fair value
reflects the amount, based on dealer quotes, that Mattel would receive at
maturity for contracts involving the same currencies and maturity dates, if
they had been entered into as of year-end 1999 and 1998. The differences
between the fair value and the contract amounts are expected to be fully offset
by foreign currency exchange gains and losses on the underlying hedged
transactions.
Buy Sell
------------------------------- -------------------------------
Weighted Weighted
Contract Average Fair Contract Average Fair
Amount Contract Rate Value Amount Contract Rate Value
-------- ------------- -------- -------- ------------- --------
(In thousands of US dollars)
1999
Euro.................... $ 92,445 1.01 $ 90,922 $253,096 1.05 $244,448
British pounds
sterling............... 6,316 1.61 6,332 16,679 1.65 16,433
Canadian dollar......... 7,604 1.45 7,619 40,679 .68 41,498
Japanese yen............ -- -- -- 19,412 116 19,557
Australian dollar....... -- -- -- 8,438 .64 8,661
Swiss franc............. 14,893 1.58 14,798 -- -- --
Indonesian rupiah....... 19,455 7,676 20,998 -- -- --
Singapore dollar........ -- -- -- 4,066 1.68 4,091
Thai bhat............... 3,990 39.59 4,207 -- -- --
-------- -------- -------- --------
$144,703 $144,876 $342,370 $334,688
======== ======== ======== ========
1998
German mark............. $ 19,119 1.67 $ 18,984 $144,660 1.68 $145,688
Italian lira............ 20,014 1,764.00 21,155 68,358 1,660.00 67,950
Hong Kong dollar........ 55,829 8.02 57,790 -- -- --
French franc............ 27,435 5.62 27,536 9,105 5.82 9,479
British pounds
sterling............... 6,548 0.60 6,415 66,856 0.61 66,950
Canadian dollar......... 16,144 1.55 16,545 18,794 1.46 18,119
Spanish peseta.......... 5,625 142.30 5,577 2,899 148.23 2,997
Dutch guilder........... 5,079 1.89 5,050 8,086 1.96 8,342
Japanese yen............ -- -- -- 12,501 116.00 12,759
Australian dollar....... 4,988 1.66 5,268 21,610 1.58 21,732
Belgian franc........... -- -- -- 11,641 35.46 11,871
Swiss franc............. 18,341 1.37 18,251 -- -- --
Mexican peso............ -- -- -- 22,000 10.02 21,956
Indonesian rupiah....... 10,000 15,720.50 19,183 -- -- --
Singapore dollar........ -- -- -- 3,962 1.64 3,943
Brazilian real.......... -- -- -- 2,500 1.25 2,554
-------- -------- -------- --------
$189,122 $201,754 $392,972 $394,340
======== ======== ======== ========
Manufacturing Risk
Mattel owns and operates manufacturing facilities and utilizes third-party
manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and
Thailand. A risk of political instability and civil unrest exists in these
countries, which could temporarily or permanently damage Mattel's manufacturing
operations located there. Mattel's business, financial position and results of
operations would be negatively impacted by a significant disruption to its
manufacturing operations or suppliers.
40
Effects of Inflation
Inflation rates in the US and in major foreign countries where Mattel does
business have not had a significant impact on its results of operations or
financial position during the three years ended December 31, 1999. The US
Consumer Price Index increased 2.7% in 1999, 1.6% in 1998 and 1.7% in 1997.
Mattel receives some protection from the impact of inflation from high turnover
of inventories and its ability to pass on higher prices to consumers.
Year 2000 Update
To address the year 2000 issue, in early 1998 Mattel established an in-house
project team and initiated a comprehensive plan to assess, remediate and test
Mattel's internal systems, hardware and processes, including key operational,
manufacturing and financial systems. The plan also included steps to verify
that all key third-party suppliers and customers were taking measures to ensure
their own readiness and timely implementation. All phases of the year 2000
readiness plan were completed as scheduled. To date, Mattel has not experienced
any year 2000 issues with its internal operating systems or with its third
party customers and suppliers. In addition, Mattel did not experience any loss
in revenues due to the year 2000 issue.
All software products currently available for sale to consumers and under
development are year 2000 compliant. However, several discontinued products
sold in the past may not operate as intended on certain computers due to the
year 2000 issue.
As of December 31, 1999, Mattel spent a total of approximately $13 million
in connection with addressing the year 2000 issue. Any additional charges are
expected to be minimal. These costs were largely due to the use of internal
resources dedicated to achieving year 2000 compliance, and were charged to
expense as incurred. All costs of addressing the year 2000 issue were funded
from internally generated cash.
Although unlikely given that Mattel has not experienced any year 2000 issues
to date, there can be no assurance that any future unforeseen year 2000 issues
or year 2000 issues relating to possibly non-compliant software products will
not materially adversely affect Mattel's results of operations, liquidity and
financial position or adversely affect Mattel's relationships with customers,
vendors or others.
Euro Conversion
On January 1, 1999, a single currency called the euro was introduced in
Europe. Eleven of the fifteen member countries of the European Union adopted
the euro as their common legal currency on that date. Fixed conversion rates
between these countries' existing currencies, "legacy currencies", and the euro
were established on that date. The legacy currencies are scheduled to remain
legal tender in these participating countries through July 1, 2002. During the
transition period, parties may settle transactions using the euro or a
participating country's legacy currency.
Certain of Mattel's European facilities adopted the euro as their functional
currency in 1999. The cost of system modifications to accommodate the euro was
not material to Mattel's results of operations. Based on currently available
information, the euro conversion has not had a material adverse impact on
Mattel's business or financial condition.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. Mattel is required to adopt this statement
for its fiscal year beginning January 1, 2001. Management believes the adoption
of this statement will not have a material impact on Mattel's financial
position or results of operations.
41
Cautionary Statement
Certain written and oral statements made or incorporated by reference from
time to time by Mattel or its representatives in this Form 10-K, other filings
or reports 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, and 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 which may cause actual results to differ materially from the
forward-looking statements. For a discussion of some of the factors that may
cause actual results to differ materially from those suggested by forward-
looking statements, please read carefully the information under Item 1 "Risk
Factors" on pages 13 to 18 of this Form 10-K. In addition to the Risk Factors
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 taste, which may negatively affect
Mattel's toy and consumer software 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
. Financing Considerations
--Currency fluctuations, which may affect Mattel's reportable income
--Significant changes in interest rates, both domestically and
internationally, which may negatively affect Mattel's cost of financing
both its operations and investments
. Other Risks
--Inability to successfully complete licensing and e-commerce deals in a
timely fashion, which may reduce Mattel's ability to realize the full
value of its intellectual property rights
--Development of new technologies, including the Internet, which may
create new risks to Mattel's ability to protect its intellectual
property rights
--Changes in laws or regulations, both domestically and internationally,
including those affecting the Internet, consumer products or
environmental activities or trade restrictions, which may lead to
increased costs or interruption in normal business operations of Mattel
--Current and future litigation, governmental proceedings or
environmental matters, which may lead to increased costs or interruption
in normal business operations of Mattel
--Labor disputes, which may lead to increased costs or disruption of any
of Mattel's operations
42
The risks included herein and in Item 1 "Risk Factors" are not exhaustive.
Other sections of this Form 10-K 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 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.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report. See
Item 14 of Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
43
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required under this Item relating to members of Mattel's board
of directors is incorporated by reference herein from its 2000 Notice of Annual
Meeting of Stockholders and Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after December 31, 1999. The information
with respect to the executive officers of Mattel appears under the heading
"Executive Officers of the Registrant" in Part I herein.
Item 11. Executive Compensation
The information required under this Item is incorporated by reference herein
from Mattel's 2000 Notice of Annual Meeting of Stockholders and Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this Item is incorporated by reference herein
from Mattel's 2000 Notice of Annual Meeting of Stockholders and Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999.
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated by reference herein
from Mattel's 2000 Notice of Annual Meeting of Stockholders and Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999.
44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Consolidated Financial Statements of Mattel, Inc.
Report of Independent Accountants..................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998.......... F-2
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997................................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.................................... F-6
Notes to Consolidated Financial Statements............................ F-8
2. Financial Statement Schedule for the years ended December 31, 1999, 1998
and 1997(1)
Schedule II--Valuation and Qualifying Accounts and Allowances
3. Exhibits (Listed by numbers corresponding to Item 601 of Regulation S-K)
2.0 Agreement and Plan of Merger, dated as of December 13, 1998, between
Mattel and The Learning Company, Inc. (incorporated by reference to
Exhibit 2.1 of Mattel's Current Report on Form 8-K, dated December 15,
1998)
3.0 Restated Certificate of Incorporation of Mattel (incorporated by
reference to Exhibit 3.0 to Mattel's Annual Report on Form 10-K for the
year ended December 31, 1993, File No. 001-05647)
3.1 Certificate of Amendment of Restated Certificate of Incorporation of
Mattel (incorporated by reference to Exhibit B to Mattel's Proxy
Statement dated March 23, 1996)
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
Mattel (incorporated by reference to Exhibit B to Mattel's Proxy
Statement dated March 30, 1998)
3.3* By-laws of Mattel, as amended to date
3.4 Certificate of Designations, Preferences, Rights and Limitations of
Special Voting Preferred Stock of Mattel (incorporated by reference to
Exhibit 3.0 to Mattel's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999)
4.0 Rights Agreement, dated as of February 7, 1992, between Mattel and The
First National Bank of Boston, as Rights Agent (incorporated by
reference to Exhibit 1 to Mattel's Registration Statement on Form 8-A,
dated February 12, 1992)
4.1 Amendment No. 1 to Rights Agreement, dated as of May 13, 1999, between
Mattel and BankBoston, N.A. (incorporated by reference to Exhibit 4 to
Mattel's Registration Statement on Form 8-A/A dated May 13, 1999)
4.2 Amendment No. 2 to Rights Agreement, dated as of November 4, 1999,
between Mattel and BankBoston, N.A. (incorporated by reference to
Exhibit 4.3 to Mattel's Registration Statement on Form 8-A/A dated
November 12, 1999)
4.3 Specimen Stock Certificate with respect to Mattel's Common Stock
(incorporated by reference to Mattel's Current Report on Form 8-A, dated
February 28, 1996)
4.4 Indenture dated as of February 15, 1996 between Mattel and Chase Trust
Company of California, as Trustee (incorporated by reference to Exhibit
4.1 to Mattel's Current Report on Form 8-K dated April 11, 1996)
- --------
(1) All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
45
4.5 Plan of Arrangement of Softkey Software Products Inc. under Section 182
of the Business Corporations Act (Ontario) (incorporated by reference
to Exhibit 4.4 of Learning Company's Registration Statement on Form S-
3, Registration No. 333-40549)
4.6 Voting and Exchange Trust Agreement, dated as of February 4, 1994 among
Learning Company, Softkey Software Products Inc. and R-M Trust Company,
as Trustee (incorporated by reference to Exhibit 4.3 to Learning
Company's Registration Statement on Form S-3, Registration
No. 333-40549)
4.7 Support Agreement, dated as of February 4, 1994 between Learning Company
and Softkey Software Products Inc. (incorporated by reference to
Exhibit 99.4 of Mattel's Form S-4, Registration No. 333-71587)
4.8 Voting and Exchange Trust Supplement dated as of May 12, 1999 between
Mattel, Learning Company, Softkey Software Products Inc. and CIBC
Mellon Trust Company, as Trustee (incorporated by reference to Exhibit
99.3 of Mattel's Quarterly Report of Form 10-Q for the quarterly period
ended March 31, 1999)
4.9 Support Agreement Amending Agreement dated as of May 12, 1999 between
Mattel, Learning Company and Softkey Software Products Inc.
(incorporated by reference to Exhibit 99.4 of Mattel's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1999)
4.10 Rights Agreement dated as of May 13, 1999 between Softkey Software
Products Inc., Mattel and CIBC Mellon Trust Company, as Trustee
(incorporated by reference to Exhibit 99.5 of Mattel's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1999)
4.11 Warrant to Purchase Shares of Common Stock of Mattel, Inc., dated as of
June 27, 1996 (incorporated by reference to Exhibit 4.6 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 1998)
(Mattel has not filed certain long-term debt instruments under which the
principal amount of securities authorized to be issued does not exceed
10% of its total assets. Copies of such agreements will be provided to
the Securities and Exchange Commission upon request.)
10.0 Second Amended and Restated Credit Agreement dated as of March 11, 1998
among Mattel, the Banks named therein and Bank of America National
Trust and Savings Association, as Agent (incorporated by reference to
Exhibit 99.0 to Mattel's Current Report on Form 8-K dated August 21,
1998)
10.1 Receivables Purchase Agreement dated as of March 11, 1998 among Mattel,
Mattel Factoring, Inc., the Banks named therein and NationsBank of
Texas, N.A., as Agent (incorporated by reference to Exhibit 99.1 to
Mattel's Current Report on Form 8-K dated August 21, 1998)
10.2 Distribution Agreement dated November 12, 1997 among Mattel, Morgan
Stanley & Co. Incorporated and Credit Suisse First Boston Corporation
(incorporated by reference to Exhibit 1.0 to Mattel's Current Report on
Form 8-K dated November 12, 1997)
Executive Compensation Plans and Arrangements of Mattel
10.3 Form of Indemnity Agreement between Mattel and its directors and certain
of its executive officers (incorporated by reference to Exhibit B to
Notice of Annual Meeting of Stockholders of Mattel dated March 24,
1987)
10.4 Amended and Restated Employment Agreement dated January 1, 1997 between
Mattel and Jill E. Barad (incorporated by reference to Exhibit 10.0 to
Mattel's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997)
10.5 Amended and Restated Employment Agreement dated July 29, 1996 between
Mattel and Ned Mansour (incorporated by reference to Exhibit 10.13 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
1996)
10.6* Executive Employment Agreement dated January 31, 2000 between Mattel and
Adrienne Fontanella
46
10.7* Loan Agreement dated October 29, 1999 between Mattel and Adrienne
Fontanella
10.8* Amendment to Employment Agreement and Stock Option Grant Agreements
between Mattel and Adrienne Fontanella
10.9* Executive Employment Agreement dated January 31, 2000 between Mattel
and Matthew C. Bousquette
10.10* Loan Agreement dated October 29, 1999 between Mattel and Matthew C.
Bousquette
10.11* Amendment to Employment Agreement and Stock Option Grant Agreements
between Mattel and Matthew C. Bousquette
10.12* Executive Employment Agreement dated January 31, 2000 between Mattel
and Neil B. Friedman
10.13* Loan Agreement dated October 29, 1999 between Mattel and Neil B.
Friedman
10.14* Amendment to Employment Agreement and Stock Option Grant Agreements
between Mattel and Neil B. Friedman
10.15 Mattel, Inc. Management Incentive Plan (incorporated by reference to
Exhibit 10.15 to Mattel's Annual Report on Form 10-K for the year
ended December 31, 1995)
10.16* Amendment No. 1 to Mattel, Inc. Management Incentive Plan.
10.17 Mattel, Inc. Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.16 to Mattel's Annual Report on Form 10-K for the year
ended December 31, 1995)
10.18 Amended and Restated Mattel Long-Term Incentive Plan (incorporated by
reference to Appendix A to Mattel's Proxy Statement dated April 26,
1999)
10.19* Amendment No. 1 to Amended and Restated Mattel Long-Term Incentive Plan
10.20 Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.12 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 1998)
10.21 Mattel, Inc. Amended & Restated Supplemental Executive Retirement Plan
as of May 1, 1996 (incorporated by reference to Exhibit 10.2 to
Mattel's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.22* Amendment No. 1 to Mattel, Inc. Amended & Restated Supplemental
Executive Retirement Plan
10.23 Mattel, Inc. Deferred Compensation Plan (incorporated by reference to
Exhibit 10.14 to Mattel's Annual Report on Form 10-K for the year
ended December 31, 1998)
10.24* Amendment No. 1 to Mattel, Inc. Deferred Compensation Plan
10.25 The Fisher-Price, Inc. Pension Plan (1989 Restatement) (incorporated by
reference to Exhibit 10(l) to Fisher-Price's Registration Statement on
Form 10 dated June 28, 1991)
10.26 The Fisher-Price Section 415 Excess Benefit Plan (incorporated by
reference to Exhibit 10(n) to Fisher-Price's Registration Statement on
Form 10 dated June 28, 1991)
10.27 Mattel, Inc. Personal Investment Plan, April 1, 1997 Restatement
(incorporated by reference to Exhibit 99.3 to Mattel's Current Report
on Form 8-K dated August 21, 1998)
10.28 Mattel, Inc. PIP Excess Plan (incorporated by reference to Exhibit
10.18 to Mattel's Annual Report on Form 10-K for the year ended
December 31, 1998)
10.29* Amendment No. 1 to Mattel, Inc. PIP Excess Plan
10.30 Pleasant Company Retirement Savings Plan and Trust Agreement, dated
July 1, 1995 (incorporated by reference to Exhibit 10.19 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 1998)
10.31 Mattel, Inc. 1990 Stock Option Plan (incorporated by reference to
Exhibit A to the Notice of Annual Meeting of Stockholders and Proxy
Statement of Mattel dated March 15, 1990)
47
10.32 Amendment No. 1 to the Mattel, Inc. 1990 Stock Option Plan
(incorporated by reference to the information under the heading
"Amendment to Mattel 1990 Stock Option Plan" on page F-1 of the Joint
Proxy Statement/Prospectus of Mattel and Fisher-Price included in
Mattel's Registration Statement on Form S-4, Registration No. 33-
50749)
10.33 Amendment No. 2 to the Mattel, Inc. 1990 Stock Option Plan
(incorporated by reference to Exhibit A to Mattel's Proxy Statement
dated March 22, 1995)
10.34* Amendment No. 3 to Mattel, Inc. 1990 Stock Option Plan
10.35 Form of Award Agreement evidencing award of stock appreciation rights
granted pursuant to the Mattel, Inc. 1990 Stock Option Plan to certain
executive officers of Mattel ("Award Agreement") (incorporated by
reference to Exhibit 10.12 to Mattel's Annual Report on Form 10-K for
the year ended December 31, 1991)
10.36 Form of First Amendment to Award Agreement (incorporated by reference
to Exhibit 10.21 to Mattel's Annual Report on Form 10-K for the year
ended December 31, 1993)
10.37 Notice of Grant of Stock Options and Grant Agreement (incorporated by
reference to Exhibit 99.0 to Mattel's Current Report on Form 8-K dated
May 31, 1994)
10.38 Grant Agreement for a Non-Qualified Stock Option (incorporated by
reference to Exhibit 99.1 to Mattel's Current Report on Form 8-K dated
May 31, 1994)
10.39 Award Cancellation Agreement (incorporated by reference to Exhibit 99.2
to Mattel's Current Report on Form 8-K dated May 31, 1994)
10.40 Amended and Restated Mattel, Inc. 1996 Stock Option Plan (the "1996
Plan") (incorporated by reference to Exhibit 10.2 to Mattel's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
10.41 Amendment to Amended and Restated Mattel, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 4.2 to Mattel's Registration
Statement on Form S-8 dated March 26, 1999)
10.42* Amendment No. 2 to Amended and Restated Mattel 1996 Stock Option Plan
10.43* Form of Option Agreement for Outside Directors under the 1996 Plan, as
amended
10.44* Form of Option Agreement under the 1996 Plan, as amended
10.45 Mattel, Inc. 1997 Premium Price Stock Option Plan (incorporated by
reference to Exhibit A to Mattel's Proxy Statement dated March 30,
1998)
10.46 First Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.0 to Mattel's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998)
10.47 Second Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.26 to Mattel's Annual
report on Form 10-K for the year ended December 31, 1998)
10.48* Amendment No. 3 to the Mattel, Inc. 1997 Premium Price Stock Option
Plan
10.49 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997 Premium
Price Stock Option Plan (25% Premium Grant), as amended (incorporated
by reference to Exhibit 10.1 to Mattel's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998)
10.50 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997 Premium
Price Stock Option Plan (33 1/3% Premium Grant), as amended
(incorporated by reference to Exhibit 10.2 to Mattel's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998)
10.51* Mattel 1999 Stock Option Plan
10.52* Form of Option Agreement under the Mattel 1999 Stock Option Plan (Two
Year Vesting)
10.53* Form of Option Agreement under the Mattel 1999 Stock Option Plan (Three
Year Vesting)
48
11.0* Computation of Income per Common and Common Equivalent Share
12.0* Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividends
21.0* Subsidiaries of the Registrant
23.0* Consent of PricewaterhouseCoopers LLP
24.0* Power of Attorney (on page 50 of Form 10-K)
27.0* Financial Data Schedule (EDGAR filing only)
- --------
* Filed herewith.
(b) Reports on Form 8-K
Mattel filed the following Current Reports on Form 8-K during the quarterly
period ended December 31, 1999:
Financial
Date of Report Items Reported Statements Filed
-------------- -------------- ----------------
October 19, 1999............................. 5, 7 None
October 22, 1999............................. 5, 7 None
November 12, 1999............................ 5, 7 None
November 12, 1999............................ 5, 7 None
(c) Exhibits Required by Item 601 of Regulation S-K
See Item (3) above
(d) Financial Statement Schedule
See Item (2) above
Copies of Form 10-K (which includes Exhibit 24.0), Exhibits 11.0, 12.0, 21.0
and 23.0 and the Annual Report to Stockholders are available to stockholders of
the Company without charge. Copies of other Exhibits can be obtained by
stockholders of the Company upon payment of twelve cents per page for such
Exhibits. Written requests should be sent to Secretary, Mattel, Inc., 333
Continental Boulevard, El Segundo, California 90245-5012.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MATTEL, INC.
Registrant
/s/ Kevin M. Farr
By: _________________________________
Kevin M. Farr
Chief Financial Officer
Date: As of March 10, 2000
POWER OF ATTORNEY
We, the undersigned directors and officers of Mattel, Inc. do hereby
severally constitute and appoint Ronald M. Loeb, Ned Mansour, Robert Normile,
Christopher O'Brien, and John L. Vogelstein, and each of them, our true and
lawful attorneys and agents, to do any and all acts and things in our name and
behalf in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any of them, may deem necessary or advisable to
enable said Corporation to comply with the Securities Exchange Act of 1934, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Annual Report on Form 10-K,
including specifically, but without limitation, power and authority to sign for
us or any of us, in our names in the capacities indicated below, any and all
amendments hereto; and we do each hereby ratify and confirm all that said
attorneys and agents, or any one of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William D. Rollnick Director and Acting Chairman March 10, 2000
____________________________________ of the Board
William D. Rollnick
/s/ Ronald M. Loeb Director and Acting Chief March 10, 2000
____________________________________ Executive Officer
Ronald M. Loeb
/s/ Kevin M. Farr Chief Financial Officer March 10, 2000
____________________________________ (principal financial and
Kevin M. Farr accounting officer)
/s/ Harold Brown Director March 10, 2000
____________________________________
Harold Brown
/s/ Tully M. Friedman Director March 10, 2000
____________________________________
Tully M. Friedman
/s/ Joseph C. Gandolfo Director and President, March 10, 2000
____________________________________ Worldwide Manufacturing
Joseph C. Gandolfo Operations
50
Signature Title Date
--------- ----- ----
/s/ Ned Mansour Director and President, March 10, 2000
____________________________________ Mattel, Inc.
Ned Mansour
/s/ Andrea L. Rich Director March 10, 2000
____________________________________
Andrea L. Rich
/s/ Pleasant T. Rowland Vice Chairman of the Board March 10, 2000
____________________________________ and President, Pleasant
Pleasant T. Rowland Company
/s/ Christopher A. Sinclair Director March 10, 2000
____________________________________
Christopher A. Sinclair
/s/ John L. Vogelstein Director March 10, 2000
____________________________________
John L. Vogelstein
/s/ Ralph V. Whitworth Director March 10, 2000
____________________________________
Ralph V. Whitworth
51
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Mattel, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 45 present fairly, in all material
respects, the financial position of Mattel, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 45 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of Mattel's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 2, 2000
F-1
MATTEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
Current Assets
Cash and short-term investments.................... $ 275,024 $ 469,213
Accounts receivable, less allowances of $229.2
million at December 31, 1999 and $125.1 million at
December 31, 1998................................. 1,270,005 1,150,051
Inventories........................................ 544,296 644,270
Prepaid expenses and other current assets.......... 330,702 371,772
---------- ----------
Total current assets............................. 2,420,027 2,635,306
---------- ----------
Property, Plant and Equipment
Land............................................... 35,930 35,113
Buildings.......................................... 276,880 271,580
Machinery and equipment............................ 611,948 569,428
Capitalized leases................................. 23,271 23,271
Leasehold improvements............................. 84,333 98,400
---------- ----------
1,032,362 997,792
Less: accumulated depreciation..................... 474,026 422,020
---------- ----------
558,336 575,772
Tools, dies and molds, net......................... 191,158 187,349
---------- ----------
Property, plant and equipment, net................. 749,494 763,121
---------- ----------
Other Noncurrent Assets
Intangibles, net................................... 1,393,315 1,484,634
Other assets....................................... 564,186 264,324
---------- ----------
$5,127,022 $5,147,385
========== ==========
The accompanying notes are an integral part of these statements.
Consolidated results for 1998 have been restated retroactively for the
effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 7.
F-2
MATTEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets--Continued
December 31, December 31,
1999 1998
------------ ------------
(In thousands, except
share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings.............................. $ 369,549 $ 199,006
Current portion of long-term liabilities........... 3,173 33,666
Accounts payable................................... 360,609 362,467
Accrued liabilities................................ 825,874 748,837
Income taxes payable............................... 258,319 299,058
---------- ----------
Total current liabilities........................ 1,817,524 1,643,034
---------- ----------
Long-Term Liabilities
6-3/4% senior notes, due 2000...................... 100,000 100,000
5-1/2% senior notes, due 2000...................... 200,955 200,955
6% senior notes, due 2003.......................... 150,000 150,000
6-1/8% senior notes, due 2005...................... 150,000 150,000
Medium-term notes.................................. 540,500 540,500
Mortgage note...................................... 42,380 43,007
Other.............................................. 162,976 149,086
---------- ----------
Total long-term liabilities...................... 1,346,811 1,333,548
---------- ----------
Stockholders' Equity
Preferred stock, Series A $0.01 par value, $200.00
liquidation preference per share, 750.0 thousand
shares authorized, issued and outstanding at
December 31, 1998................................. -- 8
Preferred stock, Series C $1.00 par value, $125.00
liquidation preference per share, 772.8 thousand
shares authorized; 771.9 thousand shares issued
and outstanding at December 31, 1998.............. -- 772
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 3.2 million and 5.2 million
outstanding exchangeable shares at December 31,
1999 and 1998, respectively....................... -- --
Common stock $1.00 par value, 1.0 billion shares
authorized; 433.6 million shares and 405.1 million
shares issued in 1999 and 1998, respectively...... 433,563 405,114
Additional paid-in capital......................... 1,728,954 1,845,222
Deferred compensation.............................. -- (12,265)
Treasury stock at cost; 12.0 million shares and
14.3 million shares in 1999 and 1998,
respectively...................................... (361,825) (495,347)
Retained earnings.................................. 401,642 625,197
Accumulated other comprehensive loss............... (239,647) (197,898)
---------- ----------
Total stockholders' equity....................... 1,962,687 2,170,803
---------- ----------
$5,127,022 $5,147,385
========== ==========
Commitments and Contingencies (See accompanying
notes.)
The accompanying notes are an integral part of these statements.
Consolidated results for 1998 have been restated retroactively for the
effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 7.
F-3
MATTEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands, except per share
amounts)
Net Sales................................. $5,514,950 $5,621,207 $5,455,547
Cost of sales............................. 2,913,910 2,707,904 2,635,887
---------- ---------- ----------
Gross Profit.............................. 2,601,040 2,913,303 2,819,660
Advertising and promotion expenses........ 945,955 917,665 846,448
Other selling and administrative
expenses................................. 1,190,915 1,144,801 1,013,091
Restructuring and other charges........... 345,996 157,314 343,606
Amortization of intangibles............... 91,847 129,689 487,199
Charge for incomplete technology.......... -- 56,826 20,300
Interest expense.......................... 151,609 128,468 112,612
Other income, net......................... (14,539) (13,092) (4,812)
---------- ---------- ----------
Income (Loss) Before Income Taxes and Ex-
traordinary Item......................... (110,743) 391,632 1,216
(Benefit) provision for income taxes...... (28,370) 185,579 179,327
---------- ---------- ----------
Income (Loss) Before Extraordinary Item... (82,373) 206,053 (178,111)
Extraordinary item--loss on early
retirement of debt....................... -- -- (4,610)
---------- ---------- ----------
Net Income (Loss)......................... (82,373) 206,053 (182,721)
Preferred stock dividend requirements..... 3,980 7,960 10,505
---------- ---------- ----------
Net Income (Loss) Applicable to Common
Shares................................... $ (86,353) $ 198,093 $ (193,226)
========== ========== ==========
Basic Income (Loss) Per Common Share......
Income (loss) before extraordinary item... $ (0.21) $ 0.51 $ (0.51)
Extraordinary item--loss on early
retirement of debt....................... -- -- (0.01)
---------- ---------- ----------
Net income (loss)......................... $ (0.21) $ 0.51 $ (0.52)
========== ========== ==========
Weighted average number of common shares.. 414,186 390,210 369,870
========== ========== ==========
Diluted Income (Loss) Per Common Share....
Income (loss) before extraordinary item... $ (0.21) $ 0.47 $ (0.51)
Extraordinary item--loss on early
retirement of debt....................... -- -- (0.01)
---------- ---------- ----------
Net income (loss)......................... $ (0.21) $ 0.47 $ (0.52)
========== ========== ==========
Weighted average number of common and
common equivalent shares................. 414,186 421,707 369,870
========== ========== ==========
Dividends Declared Per Common Share....... $ 0.35 $ 0.31 $ 0.27
========== ========== ==========
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 7.
Consolidated results for 1997 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
F-4
MATTEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year
---------------------------------
1999 1998 1997
--------- ----------- ---------
(In thousands)
Cash Flows From Operating Activities:
Net (loss) income......................... $ (82,373) $ 206,053 $(182,721)
Adjustments to reconcile net (loss) income
to net cash flows from operating
activities:
Noncash restructuring and integration
charges................................ 63,700 32,380 115,559
Depreciation............................ 199,830 179,135 164,060
Amortization............................ 98,769 133,549 489,937
Charge for incomplete technology........ -- 56,826 32,467
Loss on early retirement of debt, net of
tax.................................... -- -- 4,610
Increase (decrease) from changes in
assets and liabilities:
Accounts receivable................... (167,052) 141,583 (247,406)
Inventories........................... 82,077 (61,508) (48,923)
Prepaid expenses and other current
assets............................... (84,636) (26,873) (127,595)
Accounts payable, accrued liabilities
and income taxes payable............. (42,263) (104,275) 253,729
Deferred income taxes................. (7,151) (999) 64,015
Other, net............................ (2,315) 15,793 (14,344)
--------- ----------- ---------
Net cash flows from operating
activities......................... 58,586 571,664 503,388
--------- ----------- ---------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds........ (107,017) (114,387) (96,006)
Purchases of other property, plant and
equipment................................ (104,572) (162,132) (136,439)
Payment for acquisitions, net of cash
acquired................................. (5,863) (938,647) (115,231)
Proceeds from sale of business and other
property, plant and equipment............ 10,033 18,667 31,484
Investment in other long-term assets...... (70,671) (10,783) (7,816)
Other, net................................ (612) (1,484) 566
--------- ----------- ---------
Net cash flows used for investing
activities......................... (278,702) (1,208,766) (323,442)
--------- ----------- ---------
Cash Flows From Financing Activities:
Short-term borrowings, net................ 179,595 131,810 3,193
Proceeds from issuance of notes........... -- 350,000 310,000
Proceeds from issuance of Softkey
warrants................................. -- 134,346 57,462
Payments of long-term debt................ (30,254) (106,421) (265,499)
Exercise of stock options including
related tax benefit...................... 81,291 170,233 72,290
Purchase of treasury stock................ (75,507) (351,093) (242,505)
Sale of treasury stock.................... -- -- 71,248
Issuance of preferred stock............... -- -- (10,701)
Payment of dividends on common and
preferred stock.......................... (125,673) (97,970) (84,537)
Other, net................................ (670) (6,968) (1,083)
--------- ----------- ---------
Net cash flows from (used) for
financing activities............... 28,782 223,937 (90,132)
Effect of Exchange Rate Changes on Cash..... (2,855) (1,525) (17,195)
--------- ----------- ---------
(Decrease) Increase in Cash and Short-term
Investments................................ (194,189) (414,690) 72,619
Cash and Short-term Investments at Beginning
of Year.................................... 469,213 883,903 811,284
--------- ----------- ---------
Cash and Short-term Investments at End of
Year....................................... $ 275,024 $ 469,213 $ 883,903
========= =========== =========
The accompanying notes are an integral part of these statements
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 7.
Consolidated results for 1997 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
F-5
MATTEL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Other Total Stock-
Preferred Common Paid-In Treasury Deferred Retained Comprehensive holders'
Stock Stock Capital Stock Compensation Earnings Income (Loss) Equity
--------- -------- ---------- --------- ------------ --------- ------------- ------------
(In thousands)
Balance, December 31,
1996................... $827 $369,190 $1,233,753 $(215,999) $ -- $ 820,024 $ (98,008) $2,109,787
Comprehensive (loss):
Net (loss)............. (182,721) (182,721)
Unrealized gain on
securities............ 719 719
Currency translation
adjustments........... (113,177) (113,177)
---- -------- ---------- --------- -------- --------- --------- ----------
Comprehensive (loss).... (182,721) (112,458) (295,179)
Net income of Broderbund
for the three months
ended November 30, 1996
not included in results
of operations.......... 8,895 8,895
Purchase of treasury
stock.................. (480) (14,094) (227,932) (242,506)
Issuance of treasury
stock.................. (45,486) 158,511 113,025
Exercise of stock
options................ 2,135 36,655 38,790
Shares issued for
acquisitions........... 4,362 13,591 (6,193) 11,760
Issuance of Series A
Preferred Stock........ 8 202,025 202,033
Issuance of Softkey
warrants............... 57,462 57,462
Conversion of 7% Notes.. 893 15,141 16,034
Conversion of preferred
stock.................. (55) 2,761 (2,706) --
Conversion of
exchangeable shares.... 88 (88) --
Shares issued under
employee stock purchase
plan................... 62 1,208 1,270
Dividends declared on
common stock........... (77,528) (77,528)
Dividends declared on
preferred stock........ (10,505) (10,505)
---- -------- ---------- --------- -------- --------- --------- ----------
Balance, December 31,
1997................... 780 379,011 1,497,461 (285,420) -- 551,972 (210,466) 1,933,338
Comprehensive income:
Net income............. 206,053 206,053
Unrealized gain on
securities............ 10,249 10,249
Currency translation
adjustments........... 2,319 2,319
---- -------- ---------- --------- -------- --------- --------- ----------
Comprehensive income.... 206,053 12,568 218,621
Net income of Broderbund
for the month ended
December 31, 1997 not
included in results of
operations............. 209 209
Purchase of treasury
stock.................. (351,393) (351,393)
Issuance of treasury
stock.................. (65,210) 141,466 76,256
Exercise of stock
options................ 4,682 76,749 81,431
Shares issued for
acquisitions........... 5,503 111,011 (34,646) 81,868
Issuance of Softkey
warrants............... 134,346 134,346
Conversion of
exchangeable shares.... 10,900 (10,900) --
Conversion of 5-1/2%
Notes.................. 4,122 88,880 93,002
Issuance of nonvested
stock.................. 840 12,071 (12,265) 646
F-6
MATTEL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity--(Continued)
Accumulated
Additional Other Total Stock-
Preferred Common Paid-In Treasury Deferred Retained Comprehensive holders'
Stock Stock Capital Stock Compensation Earnings Income (Loss) Equity
--------- --------- ----------- ---------- ------------ --------- ------------- ------------
(In thousands)
Shares issued under
employee stock purchase
plan................... 56 814 870
Dividends declared on
common stock........... (90,431) (90,431)
Dividends declared on
preferred stock........ (7,960) (7,960)
----- --------- ----------- ---------- -------- --------- ---------- -----------
Balance, December 31,
1998................... 780 405,114 1,845,222 (495,347) (12,265) 625,197 (197,898) 2,170,803
Comprehensive (loss):
Net (loss)............ (82,373) (82,373)
Unrealized gain on
securities:
Unrealized holding
gains................. 3,184 3,184
Less: reclassification
adjustment for
realized gains
included in net
(loss)................ (11,143) (11,143)
Currency translation
adjustments........... (33,790) (33,790)
----- --------- ----------- ---------- -------- --------- ---------- -----------
Comprehensive (loss)... (82,373) (41,749) (124,122)
Conversion of Series A
Preferred Stock........ (8) 18,000 (17,992) --
Redemption of Series C
Preferred Stock........ (772) 6,382 (51,834) 46,224 --
Purchase of treasury
stock.................. (75,507) (75,507)
Issuance of treasury
stock.................. (87,300) 134,977 47,677
Exercise of stock
options................ 1,447 28,018 29,465
Shares issued for
acquisitions........... 241 5,306 5,547
Conversion of
exchangeable shares.... 2,342 (2,342) --
Shares issued under
employee stock purchase
plan................... 37 719 756
Tax adjustment related
to 1987 quasi-
reorganization......... 33,400 33,400
Exercise of warrants... (24,243) 27,828 3,585
Nonvested stock
activity............... 12,265 12,265
Dividends declared on
common stock........... (137,202) (137,202)
Dividends declared on
preferred stock........ (3,980) (3,980)
----- --------- ----------- ---------- -------- --------- ---------- -----------
Balance, December 31,
1999................... $ -- $ 433,563 $ 1,728,954 $ (361,825) $ -- $ 401,642 $ (239,647) $ 1,962,687
===== ========= =========== ========== ======== ========= ========== ===========
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 7.
Consolidated results for December 31, 1996 have been restated retroactively
for the effects of the March 1997 merger with Tyco, accounted for as a pooling
of interests. See Note 7.
F-7
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of Mattel. All
significant intercompany accounts and transactions have been eliminated in
consolidation, and certain amounts in the financial statements for prior years
have been reclassified to conform with the current year presentation.
Investments in joint ventures and other companies are accounted for by the
equity method or cost basis depending upon the level of the investment and/or
Mattel's ability to exercise influence over operating and financial policies.
Financial data for all periods presented reflect the retroactive effect of the
merger, accounted for as a pooling of interests, with Learning Company
consummated in May 1999 (see Note 7). Financial data for 1997 reflect the
retroactive effect of the merger, accounted for as a pooling of interests, with
Tyco consummated in March 1997 (see Note 7).
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into US
dollars at fiscal year-end exchange rates. Income, expense and cash flow items
are translated at weighted average exchange rates prevailing during the fiscal
year. The resulting currency translation adjustments are recorded as a
component of other comprehensive income (loss) within stockholders' equity.
Cash and Short-Term Investments
Cash includes cash equivalents, which are highly liquid investments with
maturities of three months or less when purchased. Because of the short
maturities of these instruments, the carrying amount is a reasonable estimate
of fair value.
Marketable Securities
Marketable securities, comprised principally of investments in private and
publicly-traded securities, are stated at market value and classified as
securities available-for-sale. Unrealized gains or losses are reported as a
component of other comprehensive income (loss) within stockholders' equity
until realized. Quoted market prices, which approximated cost as of the balance
sheet dates, are reasonable estimates of the portfolio's fair value. These
marketable securities, which had a cost basis of $2.1 million and $2.7 million
as of December 31, 1999 and 1998, respectively, are shown in the consolidated
balance sheets as part of other assets.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over estimated useful lives of 10 to 40 years for buildings, 3 to 10
years for machinery and equipment, and 10 to 20 years, not to exceed the lease
term, for leasehold improvements. Tools, dies and molds are amortized using the
straight-line method over three years.
F-8
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles and Long-Lived Assets
Intangible assets consist of the excess of purchase price over the fair
value of net assets acquired in purchase acquisitions, and the cost of acquired
patents and trademarks. Intangible assets are amortized using the straight-line
method over periods ranging from 2 to 40 years. Accumulated amortization was
$1,327.8 million and $1,236.8 million as of December 31, 1999 and 1998,
respectively.
The carrying value of fixed and intangible assets is periodically reviewed
to identify and assess any impairment by evaluating the operating performance
and future undiscounted cash flows of the underlying assets.
Revenue Recognition
Revenue from the sale of toy products is recognized upon shipment. Accruals
for customer discounts and rebates, and defective returns are recorded as the
related revenues are recognized.
Revenue from the sale of software products is recognized upon shipment,
provided that no significant obligations remain outstanding and collection of
the receivable is probable. Costs related to insignificant post shipment
obligations are accrued when revenue is recognized for the sale of the related
products. Allowances for good returns are provided at the time of sale and
allowances for price protection are provided at the time of commitment and are
charged against revenues. The allowances for good returns and doubtful accounts
are developed based on an evaluation of historical and expected sales
experience and by channel of distribution, and are based on information
available as of the reporting date. To the extent the future market, sell-
through experience, customer mix, channels of distribution, product pricing and
general economic and competitive conditions change, the estimated reserves
required for returns and allowances may also change. Revenues from royalty and
licensing arrangements are recognized as earned based upon performance or
product shipments.
Advertising and Promotion Costs
Costs of media advertising are expensed the first time the advertising takes
place, except for direct-response advertising, which is capitalized and
amortized over its expected period of future benefits. Direct-response
advertising consists primarily of catalogue production and mailing costs that
are generally amortized within three months from the date catalogues are
mailed. Advertising costs associated with customer benefit programs are accrued
as the related revenues are recognized. Costs related to various end-user
coupon rebate programs are expensed at the time sales are made and are
estimated based on the expected coupon redemption rate on a product-by-product
basis and are adjusted to actual at the end of each reporting period.
Software Development Costs
Costs for new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. Once technological feasibility is established, software
development costs are capitalized until the related product is launched.
Capitalized software development costs are amortized on a product-by-product
basis using the straight-line method over the estimated economic life of the
product, which is generally twelve months from when the product is launched,
which approximates the ratio that current gross revenues for a product bear to
the total of current and anticipated future gross revenues for that product. As
of December 31, 1999 and 1998, Mattel had net capitalized software development
costs of $73.1 million and $24.3 million, respectively, which are included in
the consolidated balance sheets as part of other current assets. Amortization
of software development costs included in cost of goods sold was $64.3 million,
$20.2 million and $12.1 million for the years ended December 31, 1999, 1998 and
1997, respectively.
F-9
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
Mattel has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the results of
operations for nonqualified stock options granted under Mattel's plans as such
options are granted at not less than the quoted market price of Mattel's common
stock on the date of grant.
Income Taxes
Mattel accounts for certain income and expense items differently for
financial reporting and income tax purposes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities, applying enacted statutory
tax rates in effect for the year in which the differences are expected to
reverse.
Income and Dividends Per Common Share
Share and per share data for all periods presented in these financial
statements reflect the retroactive effects of the May 1999 Learning Company
merger. The 1997 share and per share data presented in these financial
statements reflect the retroactive effects of the March 1997 Tyco merger.
In the 1997 fourth quarter, Mattel adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share. Accordingly, data for 1997 have been
restated to present basic and diluted income (loss) per common share.
Basic income (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. Earnings available to common stockholders
represent reported net income (loss) less preferred stock dividend
requirements.
Diluted income (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,
and conversion of dilutive preferred stock and convertible debt, as applicable.
F-10
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the years ended December 31 follows (in thousands):
1999 1998 1997
----------------- ----------------- ------------------
Earnings Shares Earnings Shares Earnings Shares
-------- ------- -------- ------- --------- -------
Income (loss) before
extraordinary item..... $(82,373) $206,053 $(178,111)
Extraordinary item--loss
on early retirement of
debt................... -- -- (4,610)
-------- -------- ---------
Net income (loss)....... (82,373) 206,053 (182,721)
Less: preferred stock
dividend requirements.. (3,980) (7,960) (10,505)
-------- -------- ---------
Earnings available to
common stockholders.... $(86,353) 414,186 $198,093 390,210 $(193,226) 369,870
Dilutive securities:
Dilutive stock
options.............. 8,685
Warrants.............. 4,812
Preferred stock....... 18,000
-------- ------- -------- ------- --------- -------
Diluted earnings
available to common
stockholders........... $(86,353) 414,186 $198,093 421,707 $(193,226) 369,870
======== ======= ======== ======= ========= =======
Premium price stock options totaling 16.9 million, other nonqualified stock
options totaling 23.2 million, convertible debt, preferred stock and warrants
were excluded from the calculation of diluted earnings per share in 1999
because they were anti-dilutive. Premium price options totaling 18.7 million,
Series C preferred stock and convertible debt were excluded from the
calculation of diluted earnings per share 1998 because they were anti-dilutive.
Convertible debt, preferred stock and warrants were excluded from the
calculation of diluted earnings per share in 1997 because they were anti-
dilutive.
Foreign Currency Contracts
Mattel enters into foreign currency forward exchange and option contracts
primarily as hedges of inventory purchases, sales and other intercompany
transactions denominated in foreign currencies to limit the effect of exchange
rate fluctuations on its results of operations and cash flows. Mattel does not
enter into contracts for speculative purposes. Gains and losses related to firm
commitments, which qualify for hedge accounting, are deferred and are
recognized in the results of operations, balance sheet, and statement of cash
flows as part of the underlying transaction. Contracts that do not qualify for
hedge accounting are marked to market with gains and losses recognized in the
results of operations currently. If a derivative previously designated as a
hedge of a foreign currency commitment is terminated prior to the transaction
date of the related commitment, the resultant gain or loss is recognized at the
time of maturity of the original contract as a component of other income, net.
Note 2--Income Taxes
Consolidated pre-tax income (loss) consists of the following (in thousands):
For the Year
------------------------------
1999 1998 1997
--------- -------- ---------
US operations................................ $(388,382) $(25,271) $(373,836)
Foreign operations........................... 277,639 416,903 375,052
--------- -------- ---------
$(110,743) $391,632 $ 1,216
========= ======== =========
F-11
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The (benefit) provision for current and deferred income taxes consists of
the following (in thousands):
For the Year
----------------------------
1999 1998 1997
-------- -------- --------
Current
Federal.................................... $ 9,816 $ 61,434 $101,916
State...................................... 7,400 6,500 24,796
Foreign.................................... 59,400 110,300 82,628
-------- -------- --------
76,616 178,234 209,340
-------- -------- --------
Deferred
Federal.................................... (121,506) 18,179 (26,335)
State...................................... 3,420 2,366 1,587
Foreign.................................... 13,100 (13,200) (7,962)
-------- -------- --------
(104,986) 7,345 (32,710)
-------- -------- --------
(Benefit) provision including extraordinary
item........................................ (28,370) 185,579 176,630
Benefit allocated to extraordinary item...... -- -- 2,697
-------- -------- --------
Total (benefit) provision for income taxes... $(28,370) $185,579 $179,327
======== ======== ========
Deferred income taxes are provided principally for net operating loss
carryforwards, certain reserves, depreciation, employee compensation-related
expenses, acquired technology, and certain other expenses that are recognized
in different years for financial statement and income tax purposes. Mattel's
deferred income tax assets (liabilities) were comprised of the following (in
thousands):
As of Year End
--------------------
1999 1998
--------- ---------
Operating loss and tax credit carryforwards............ $ 426,836 $ 254,770
Sales allowances and inventory reserves................ 118,729 122,178
Deferred compensation.................................. 40,372 37,022
Excess of tax basis over book basis.................... 22,142 21,917
Restructuring and integration charges.................. 68,091 23,030
Postretirement benefits................................ 12,790 12,842
Acquired technology.................................... 9,181 6,170
Other.................................................. 48,858 42,000
--------- ---------
Gross deferred income tax assets..................... 746,999 519,929
--------- ---------
Excess of book basis over tax basis.................... (37,800) (30,851)
Retirement benefits.................................... (19,933) (15,570)
Deferred intangible assets............................. (54,791) (20,329)
Other.................................................. (26,407) (9,159)
--------- ---------
Gross deferred income tax liabilities................ (138,931) (75,909)
Deferred income tax asset valuation allowances......... (234,206) (175,144)
--------- ---------
Net deferred income tax assets......................... $ 373,862 $ 268,876
========= =========
F-12
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management considered all available evidence and determined that a valuation
allowance of $234.2 million was required as of December 31, 1999 for certain
tax credit and net operating loss carryforwards that would likely expire prior
to their utilization. However, management feels it is more likely than not that
Mattel will generate sufficient taxable income in the appropriate carryforward
periods to realize the benefit of the remaining net deferred tax assets of
$373.9 million.
Differences between the (benefit) provision for income taxes at the US
federal statutory income tax rate and the (benefit) provision in the
consolidated statements of operations were as follows (in thousands):
For the Year
----------------------------
1999 1998 1997
-------- -------- --------
(Benefit) provision at federal statutory
rates........................................ $(38,760) $136,927 $ 426
Increase (decrease) resulting from:
Losses without income tax benefit........... 33,553 1,821 1,468
Foreign earnings taxed at different rates,
including withholding taxes................ (63,616) (34,221) (40,803)
State and local taxes, net of federal
benefit.................................... 6,165 5,763 17,149
Non-deductible amortization, merger and
restructuring charges...................... 29,391 65,493 139,363
Effect of change in valuation allowance..... -- (8,766) 50,679
Other....................................... 4,897 18,562 11,045
-------- -------- --------
Total (benefit) provision for income
taxes.................................... $(28,370) $185,579 $179,327
======== ======== ========
Appropriate US and foreign income taxes have been provided for earnings of
foreign subsidiary companies that are expected to be remitted in the near
future. The cumulative amount of undistributed earnings of foreign subsidiaries
that Mattel intends to permanently invest and upon which no deferred US income
taxes have been provided is $1.4 billion at December 31, 1999. The additional
US income tax on the unremitted foreign earnings, if repatriated, would be
offset in whole or in part by foreign tax credits.
As of December 31, 1999, Mattel has US net operating loss carryforwards
totaling $740.2 million and credit carryforwards of $53.4 million for federal
income tax purposes. The net operating loss carryforwards expire during the
years 2000 to 2019, while $49.2 million of the tax credits expire during the
years 2000 to 2010 with the remainder having no expiration date. Utilization of
these loss and credit carryforwards are subject to annual limitations, and
Mattel has established a valuation allowance for the carryforwards which are
not expected to be utilized. The goodwill recorded in connection with Tyco's
1991 acquisition of Matchbox and Learning Company's 1998 acquisition of
Mindscape, Inc. have been reduced by the tax effect of the portion of the net
operating losses which Mattel expects to utilize.
Certain foreign subsidiaries have net operating loss carryforwards totaling
$219.6 million ($135.4 million with no expiration date, $82.5 million expiring
during the years 2000 to 2004, and $1.7 million expiring after 2004).
Generally accepted accounting principles require that tax benefits related
to the exercise by employees of nonqualified stock options be credited to
additional paid-in capital. In 1999, 1998 and 1997, nonqualified stock options
exercised resulted in credits to additional paid-in capital totaling $15.0
million, $38.7 million and $20.2 million, respectively.
The Internal Revenue Service has completed its examination of the Mattel,
Inc. federal income tax returns through December 31, 1994.
F-13
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Employee Benefits
Mattel and certain of its subsidiaries have retirement plans covering
substantially all employees of these companies. Expense related to these plans
totaled $18.6 million, $20.0 million and $19.0 million in 1999, 1998 and 1997,
respectively.
Pension Plans
Mattel provides defined benefit pension plans, which satisfy the
requirements of the Employee Retirement Income Security Act of 1974 ("ERISA").
With the exception of the Fisher-Price Pension Plan, activity related to
Mattel's pension plans, including those of foreign affiliates, was not
significant during any year.
The components of net pension income for the Fisher-Price Pension Plan,
based upon a December valuation date for the year ended December 31, 1999 and
an October valuation date for the years ended December 31, 1998 and 1997, are
detailed below (in thousands):
For the Period Ended
----------------------------
1999 1998 1997
-------- -------- --------
Service cost.................................. $ 2,829 $ 2,508 $ 2,594
Interest cost................................. 14,655 10,929 10,327
Expected return on plan assets................ (27,237) (18,949) (16,163)
Amortization of:
Unrecognized prior service cost............. 88 108 134
Unrecognized net asset...................... (1,284) (2,569) (2,569)
Plan amendment loss (gain).................... 1,386 1,154 (826)
-------- -------- --------
Net pension income............................ $ (9,563) $ (6,819) $ (6,503)
======== ======== ========
Reconciliation of the funded status of Fisher-Price's domestic pension plan
to the related prepaid asset included in the consolidated balance sheets is as
follows (in thousands):
As of Year End
-----------------
1999 1998
-------- -------
Funded status of the plan................................. $ 65,401 $41,335
Unrecognized net gain..................................... (19,551) (4,438)
Unrecognized prior service cost........................... 692 1,366
Unrecognized net transition asset......................... -- (1,285)
-------- -------
Prepaid pension asset..................................... $ 46,542 $36,978
======== =======
F-14
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation of the assets and liabilities of Fisher-Price's domestic
pension plan are as follows (in thousands):
As of Year End
------------------
1999 1998
-------- --------
Change in Plan Assets
Plan assets at fair value, beginning of year........... $197,912 $202,887
Actual return on plan assets........................... 35,588 2,793
Benefits paid.......................................... (10,707) (7,768)
-------- --------
Plan assets at fair value, end of year................. $222,793 $197,912
======== ========
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year........ $156,577 $142,078
Service cost........................................... 2,829 2,508
Interest cost.......................................... 14,655 10,929
Plan amendments........................................ 2,003 1,154
Actuarial (gain) loss.................................. (7,965) 7,676
Benefits paid.......................................... (10,707) (7,768)
-------- --------
Projected benefit obligation, end of year.............. $157,392 $156,577
======== ========
For the Period
-------------------
1999 1998 1997
----- ----- -----
Assumptions:
Weighted average discount rate.......................... 8.00% 7.50% 7.75%
Rate of future compensation increases................... 4.00% 4.00% 4.00%
Long-term rate of return on plan assets................. 11.00% 11.00% 11.00%
During 1999, Mattel applied for a determination letter from the Internal
Revenue Service related to its planned conversion of the Fisher-Price Pension
Plan from a career-average plan to a cash balance plan. As of December 31,
1999, the proposed cash balance plan is under review by the Internal Revenue
Service.
Other Retirement Plans
Domestic employees are eligible to participate in 401(k) savings plans
sponsored by Mattel or its subsidiaries, which are defined contribution plans
satisfying ERISA requirements. Mattel also maintains unfunded supplemental
executive retirement plans which are nonqualified defined benefit plans
covering certain key executives. For 1999, 1998 and 1997, the accumulated and
vested benefit obligations and related expenses of these plans were not
significant.
Deferred Compensation and Excess Benefit Plans
Mattel provides a deferred compensation plan which permits certain officers
and key employees to elect to defer portions of their compensation. The
deferred compensation plan, together with certain contributions made by Mattel
and employees to an excess benefit plan, earn various rates of return. The
liability for these plans as of December 31, 1999 and 1998 was $65.1 million
and $47.8 million, respectively. Mattel's contribution to these plans and the
related administrative expense were not significant to the results of
operations during any year.
F-15
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mattel has purchased group trust-owned life insurance contracts designed to
assist in funding these programs. The cash surrender value of these policies,
valued at $55.7 million and $40.7 million as of December 31, 1999 and 1998,
respectively, are held in an irrevocable rabbi trust which is included in other
assets in the consolidated balance sheets.
Postretirement Benefits
Fisher-Price has an unfunded postretirement health insurance plan covering
certain eligible domestic employees hired prior to January 1, 1993. Details of
the expense for the Fisher-Price plan recognized in the consolidated statements
of operations for the years ended December 31, 1999, 1998 and 1997 are as
follows (in thousands):
For the Year
--------------------
1999 1998 1997
------ ------ ------
Service cost........................................... $ 224 $ 218 $ 284
Interest cost.......................................... 2,531 2,416 2,465
------ ------ ------
Net postretirement benefit cost........................ $2,755 $2,634 $2,749
====== ====== ======
Amounts included in the consolidated balance sheets for this plan are as
follows (in thousands):
As of Year End
----------------
1999 1998
------- -------
Current retirees....................................... $29,988 $25,140
Fully eligible active employees........................ 3,013 4,222
Other active employees................................. 4,162 4,239
------- -------
Accumulated postretirement benefit obligation.......... 37,163 33,601
Unrecognized net loss.................................. (6,254) (1,716)
------- -------
Accrued postretirement benefit liability............... $30,909 $31,885
======= =======
Reconciliation of the liabilities of Fisher-Price's postretirement health
insurance plan are as follows (in thousands):
As of Year End
----------------
1999 1998
------- -------
Change in Accumulated Postretirement Benefit
Obligation
Accumulated postretirement benefit obligation,
beginning of year................................. $33,601 $33,315
Service cost....................................... 224 218
Interest cost...................................... 2,531 2,416
Actuarial loss..................................... 4,538 503
Benefits paid, net of participant contributions.... (3,731) (2,851)
------- -------
Accumulated postretirement benefit obligation, end
of year........................................... $37,163 $33,601
======= =======
F-16
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The discount rates used in determining the accumulated postretirement
benefit obligation were 8.00% for 1999, 7.50% for 1998 and 7.75% for 1997. For
all participants, the health care cost trend rate for expected claim costs was
assumed to be 5.50% in 1999 and remaining constant thereafter. A one percentage
point increase or decrease in the assumed health care cost trend rate for each
future year would have the following effect on the accumulated postretirement
benefit obligation and the service and interest cost recognized as of and for
the year ended December 31, 1999 (in thousands):
One Percentage
Point
-----------------
Increase Decrease
-------- --------
Accumulated postretirement benefit obligation............. $3,729 $(3,188)
Service and interest cost................................. 284 (239)
Domestic employees of Mattel participate in a contributory postretirement
benefit plan. The ongoing costs and obligations associated with the Mattel,
Inc. plan are not significant to the financial position and results of
operations during any year.
Incentive Awards
In June 1999, the stockholders approved the Amended and Restated Mattel
Long-Term Incentive Plan ("Amended and Restated LTIP"). The Amended and
Restated LTIP is a three-year plan available to certain key executives of
Mattel, Inc. Awards are based upon the financial performance of Mattel over a
three-year period and are paid in the quarter following the end of the three-
year measurement period. No expense was recorded in 1999 for awards under the
Amended and Restated LTIP. Amounts charged to operating expense in 1998 and
1997 under the 1996--1998 LTIP were $10.8 million and $13.8 million,
respectively.
Mattel also has annual incentive compensation plans for officers and key
employees based on Mattel's performance and subject to certain approvals of the
Compensation/Options Committee of the board of directors. No expense was
recorded in 1999 for awards under these plans. For the years ended December 31,
1998 and 1997, $11.7 million and $23.2 million, respectively, were charged to
operating expense for awards under these plans. For the year ended December 31,
1999, $22.0 million was charged to operating expense related to a special
award. This special broad-based employee award was approved by Mattel's board
of directors and was designed to provide a competitive compensation level to
retain and motivate employees of Mattel.
Prior to the May 1999 merger, Learning Company maintained the 1990 Long-Term
Equity Incentive Plan for certain senior executives. Under this plan, 0.8
million shares of nonvested stock were issued during 1998. The aggregate fair
market value of the nonvested stock was being amortized to compensation expense
over the restriction period. At the time of the 1999 merger, the nonvested
stock became fully vested as a result of change of control provisions and the
remaining unamortized amount of $12.3 million was charged to operating expense
in 1999.
Prior to the March 1997 merger, Tyco had a Long-Term Incentive Plan for
certain senior executives, under which Tyco awarded Restricted Stock Units
("RSU"). The aggregate fair market value of the RSUs was being amortized to
compensation expense by Tyco over the restriction period. At the time of the
1997 merger, the RSUs were converted into approximately 244 thousand shares of
Mattel common stock which approximated the fair value of the RSUs on the merger
consummation date and the remaining unamortized amount of $5.1 million was
charged to operating expense.
F-17
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Seasonal Financing and Long-Term Debt
Seasonal Financing
Mattel maintains and periodically amends or replaces an unsecured committed
revolving credit agreement with a commercial bank group that is used as the
primary source of financing the seasonal working capital requirements of its
domestic and certain foreign affiliates. The agreement in effect during 1999
consisted of a committed unsecured facility providing a total of up to $1.0
billion in seasonal financing (a five-year facility that expires in 2003).
Within the facility, up to $700.0 million was a standard revolving credit line
available for advances and backup for commercial paper issuances. Interest was
charged at various rates selected by Mattel, ranging from market commercial
paper rates to the bank reference rate. The remaining $300.0 million was
available for nonrecourse purchases of certain trade accounts receivable of
Mattel by the commercial bank group providing the credit line. The agreement
required Mattel to meet financial covenants for consolidated debt-to-capital
and interest coverage and Mattel was in compliance with such covenants during
1999. This agreement will continue to be in effect during 2000. In addition,
Mattel avails itself of uncommitted domestic facilities provided by certain
banks to issue short-term money market loans.
To meet seasonal borrowing requirements of certain foreign affiliates,
Mattel negotiates individual financing arrangements, generally with the same
group of banks that provided credit in the prior year. Foreign credit lines
total approximately $370 million, a portion of which is used to support letters
of credit. Mattel expects to extend these credit lines throughout 2000 and
believes available amounts will be adequate to meet its seasonal financing
requirements. Mattel also enters into agreements with banks of its foreign
affiliates for nonrecourse sales of certain of its foreign subsidiary
receivables.
TLC Multimedia Inc., a wholly-owned subsidiary of Learning Company, had a
revolving line of credit, of which $40.0 million was outstanding as of December
31, 1998. Learning Company was also party to a receivables purchase agreement
for nonrecourse sales of certain domestic trade accounts receivable, of which
$75.0 million was utilized as of December 31, 1998. Learning Company had a
European accounts receivable facility for sales with recourse of certain
European trade accounts receivable of up to $25.0 million, which was fully
utilized as of December 31, 1998. Upon consummation of the May 1999 merger, all
outstanding borrowings under the revolving line of credit and the European
accounts receivable facility were repaid and the revolving line of credit and
the domestic and European accounts receivable facilities were terminated by
Mattel.
F-18
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest rates charged on Mattel's working capital credit lines are adjusted
on a periodic basis; therefore, the carrying amounts of such obligations are a
reasonable approximation of their fair value. Information relating to Mattel's
domestic and foreign credit lines and other short-term borrowings is summarized
as follows (in thousands):
For the Year
--------------------------------
1999 1998 1997
---------- ---------- --------
Balance at end of year
Domestic.................................. $ 293,744 $ 119,175 $ 35,150
Foreign................................... 75,805 79,831 17,468
Maximum amount outstanding
Domestic.................................. $1,207,000 $1,076,600 $558,000
Foreign................................... 117,000 141,000 67,000
Average borrowing
Domestic.................................. $ 573,100 $ 400,800 $178,000
Foreign................................... 40,000 58,000 40,000
Weighted average interest rate on average
borrowing
Domestic (computed daily)................. 5.5% 5.6% 5.7%
Foreign (computed monthly)................ 33.0% 20.3% 11.9%
6 -3/4% Senior Notes
In May 1993, Mattel issued $100.0 million aggregate principal amount of 6 -
3/4% Senior Notes maturing May 15, 2000. Interest is payable semiannually on
the fifteenth day of May and November. At December 31, 1999 and 1998, the bid
prices for the 6 -3/4% Senior Notes, as provided by one of the underwriters,
were $999.40 and $1,014.00, respectively, based on a par value of $1,000.00. As
of December 31, 1999, the 6- 3/4% Senior Notes are classified in the
consolidated balance sheets as a long-term liability because management has the
ability and intent to repay this obligation upon maturity with proceeds from
the issuance of other long-term debt instruments.
5 -1/2% Senior Convertible Notes ("5- 1/2% Notes")
In October 1995, Learning Company issued $350.0 million aggregate principal
amount of 5 -1/2% Notes maturing November 1, 2000. Interest is payable
semiannually on the first day of May and November. The 5 -1/2% Notes are
convertible at the option of the holders into common stock at $53.00 per share.
The terms of the 5 -1/2% Notes provide for early redemption at the option of
the issuer, in whole or in part, at any time on or after November 2, 1998 at
redemption prices equal to 102.2% of the principal amount reducing annually to
100% by November 1, 2000. During the years ended December 31, 1998 and 1997,
Learning Company repurchased $6.0 million and $28.0 million, respectively, of 5
- -1/2% Notes. In June 1998, Learning Company repurchased $96.7 million of 5 -
1/2% Notes in exchange for issuance of 4.1 million shares of common stock. At
December 31, 1999 and 1998, the bid prices for the 5 -1/2% Notes, as provided
by one of the underwriters, were $980.00 and $985.00, respectively, based on a
par value of $1,000.00. As of December 31, 1999, the 5 -1/2% Senior Notes are
classified in the consolidated balance sheets as a long-term liability because
management has the ability and intent to repay this obligation upon maturity
with proceeds from the issuance of other long-term debt instruments.
Mattel assumed Learning Company's obligations related to the 5 -1/2% Notes
upon consummation of the May 1999 merger. As a result, the 5 -1/2% Notes are
now convertible at the option of the holders into a number of shares of Mattel
common stock determined by dividing the principal amount of the notes to be
converted by the $53.00 conversion price and multiplying the resulting number
by 1.2.
F-19
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1995, Tribune Company made an investment in Learning Company in
the form of $150.0 million aggregate principal amount of 5 -1/2% Notes. These
notes were sold by Tribune Company during 1997 in a private transaction to an
investor group prior to the issuance by Learning Company of 750.0 thousand
shares of Series A Convertible Participating Preferred Stock ("Series A
Preferred Stock") and were surrendered by the investor group for the shares of
the Series A Preferred Stock.
6% and 6 -1/8% Senior Notes
In July 1998, Mattel issued $300.0 million aggregate principal amount of
senior notes, $150.0 million of which were 6% Senior Notes maturing July 15,
2003 and $150.0 million of which were 6 -1/8% Senior Notes maturing July 15,
2005. Interest is payable semiannually on the fifteenth day of January and
July. At December 31, 1999 and 1998, the bid prices for the 6% and 6 -1/8%
Senior Notes, as provided by one of the underwriters, were $929.20 and
$1,004.40, respectively, for the 6% Senior Notes and $884.60 and $998.65,
respectively, for the 6 -1/8% Senior Notes, based on a par value of $1,000.00.
Medium-Term Notes ("MT Notes")
During the 1994 third quarter, Mattel commenced a program for the issuance
of debt and equity securities under various shelf registration statements. In
November 1998, Mattel filed its current universal shelf registration statement
allowing the issuance of up to $400.0 million of debt and equity securities,
all of which was available to be issued as of December 31, 1999. The following
is a summary of MT Notes currently outstanding (in millions, except bid
prices):
Bid Price (b)
---------------------------------------
Year Issued Amount Maturity Date Rate (a) 1999 1998
- ----------- ------ ------------- ------------ ------------------ --------------------
1994.................... $ 50.5 12/01--12/04 8.48%--8.55% $1,008.57--$991.65 $1,052.61--$1,112.70
1995.................... 130.0 04/02--05/07 7.01%--7.65% 937.40-- 963.78 1,043.20-- 1,051.34
1997.................... 310.0 11/04--07/12 6.70%--7.49% 867.40-- 912.10 1,021.59-- 1,073.45
1998.................... 50.0 11/13 6.50%--6.61% 777.50-- 786.30 990.52-- 1,000.85
- --------
(a) Interest is payable semiannually at fixed rates on the fifteenth day of May
and November.
(b) Based on a par value of $1,000.00.
Mortgage Note
In 1990, Mattel borrowed $45.0 million under a mortgage agreement
collateralized by its headquarters office facility in El Segundo, California.
Interest accrues at 10.15% and monthly principal and interest payments are due
through December 2005. The fair value of the original mortgage note, estimated
by discounting future cash flows at interest rates currently available for debt
with the same credit rating, similar terms and maturity date, was approximately
$46 million and $51 million at December 31, 1999 and 1998, respectively.
7% Convertible Subordinated Notes ("7% Notes")
Upon consummation of the March 1997 merger, Mattel assumed Tyco's $16.0
million obligation related to the 7% Notes. On September 10, 1997, the holder
converted all of the 7% Notes into 892.7 thousand shares of Mattel common
stock.
F-20
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10 -1/8% Senior Subordinated Notes ("10 -1/8% Notes")
Upon consummation of the March 1997 merger, Mattel assumed Tyco's $126.5
million obligation related to the 10 -1/8% Notes. On August 15, 1997, Mattel
exercised its option and redeemed the 10 -1/8% Notes at 103.797% of par
together with accrued interest. In the third quarter of 1997, Mattel recognized
a pre-tax extraordinary loss of $7.3 million, and a related income tax benefit
of $2.7 million, as a result of the early retirement.
6 -7/8% Senior Notes
Mattel's $100.0 million of 6 -7/8% Senior Notes issued in August 1992 were
repaid upon maturity on August 1, 1997.
Scheduled Maturities
The aggregate amounts of long-term debt and other obligations maturing in
the next five years are as follows (in thousands):
MT Mortgage
Senior Notes Notes Note Other Total
------------ ------- -------- ------ --------
2000.............................. $301,000 $ -- $600 $2,500 $304,100
2001.............................. -- 30,500 700 500 31,700
2002.............................. -- 30,000 800 200 31,000
2003.............................. 150,000 30,000 800 200 181,000
2004.............................. -- 50,000 900 200 51,100
Note 5--Stockholders' Equity
Preference Stock and Preference Share Purchase Rights
Mattel is authorized to issue 20.0 million shares of $0.01 par value
preference stock, of which none is currently outstanding. There are 2.0 million
shares of $0.01 par value preference stock designated as Series E Junior
Participating Preference Stock in connection with a distribution of Preference
Share Purchase Rights (the "Rights") to Mattel's common stockholders. The
Rights may be exercised by their holders to purchase shares of Mattel's Series
E Junior Participating Preference Stock upon the occurrence of a change of
control as defined in the rights agreement. The Rights will expire on February
17, 2002, unless the agreement is further extended or the Rights are earlier
redeemed or exchanged by Mattel.
Preferred Stock
Mattel is authorized to issue 3.0 million shares of $1.00 par value
preferred stock, of which 771.9 thousand shares were outstanding as of December
31, 1998.
--Series A Preferred Stock
During 1997, Learning Company issued 750.0 thousand shares of Series A
Preferred Stock to an investor group in exchange for $150.0 million of 5- 1/2%
Notes. Just prior to the consummation of the May 1999 merger, each share of
Series A Preferred Stock was converted into 20 shares of Learning Company
common stock, and the resale restrictions expired.
F-21
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An extraordinary loss of approximately $61 million was recognized upon
conversion of the 5- 1/2% Notes into the Series A Preferred Stock due to the
appreciation of the underlying common stock between the date the conversion
agreement was signed and the date the preferred stock was issued. The resulting
income tax benefit related to the extraordinary loss was also estimated to be
approximately $61 million. As a result, the extraordinary loss, net of tax, was
determined to be immaterial and was not disclosed as a separate item in the
consolidated statement of operations for the year ended December 31, 1997.
--Series C Mandatorily Convertible Redeemable Preferred Stock ("Series C
Preferred Stock")
During 1996, Tyco sold 772.8 thousand shares of Series C Preferred Stock.
Each share of Series C Preferred Stock was converted into like Mattel preferred
stock as a result of the March 1997 merger. Series C Depositary Shares
("Depositary Shares"), each representing one twenty-fifth of a share of Series
C Preferred Stock, totaling 19.3 million shares, were sold by the depositary as
part of the above offering. Each Depositary Share was converted into a like
Mattel depositary share as a result of the March 1997 merger. On July 1, 1999,
all outstanding shares of Series C Preferred Stock (and the related Depositary
Shares) were converted by the holders into 7.7 million shares of Mattel common
stock pursuant to terms of the certificate of designations.
--Series B Voting Convertible Exchangeable Preferred Stock ("Series B
Preferred Stock")
During 1994, Tyco sold 47.6 thousand shares of Series B Preferred Stock to a
private investment group. Each share of Series B Preferred Stock was converted
into like Mattel preferred stock as a result of the March 1997 merger. On
December 2, 1997, all outstanding shares of Series B Preferred Stock were
converted by the holders into 2.8 million shares of Mattel common stock.
Special Voting Preferred Stock
Mattel is authorized to issue one share of $1.00 par value Special Voting
Preferred Stock, which was issued in exchange for one share of Learning Company
special voting stock in connection with the May 1999 merger. The par value and
liquidation preference of the Special Voting Preferred Stock are $1.00 and
$10.00 per share, respectively. The Special Voting Preferred Stock has a number
of votes equal to the number of outstanding exchangeable shares which are not
owned by Mattel, its subsidiaries or any entity controlled by Mattel. The
Special Voting Preferred Stock votes together with the holders of Mattel's
common stock as a single class on all matters on which the holders of Mattel's
common stock may vote. No dividends are paid on the Special Voting Preferred
Stock. The Special Voting Preferred Stock will be redeemed for $10.00 on
February 4, 2005, the redemption date for the exchangeable shares, unless the
board of directors of Mattel's subsidiary, Softkey Software Products Inc.,
extends or accelerates the redemption date.
Common Stock
In May 1998, the stockholders of Mattel approved an amendment to Mattel's
Restated Certificate of Incorporation that increased the number of shares of
authorized common stock from 600.0 million to 1.0 billion in order to
accommodate issuance of common stock in connection with possible future mergers
and other financing transactions, future stock dividends or splits, future
awards pursuant to Mattel's stock option plans, warrant exercises, and other
general corporate purposes.
Exchangeable Shares and Related Softkey Warrants
As of December 31, 1999 and 1998, there were 3.2 million and 5.2 million
outstanding exchangeable shares, respectively, which were not owned by Mattel,
its subsidiaries or any entity controlled by Mattel. As a
F-22
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
result of the May 1999 merger, each exchangeable share is convertible at the
option of the holder, without additional payment, for the right to receive 1.2
shares of Mattel common stock until February 4, 2005. On that date, any
exchangeable shares not previously converted will be redeemed at the current
market price of Mattel's common stock multiplied by 1.2. The redemption price
will be paid in the form of Mattel common stock, plus cash equal to any unpaid
dividends. The board of directors of Mattel's subsidiary, Softkey Software
Products Inc., may extend the automatic redemption date at its option and may
accelerate the automatic redemption date if the number of outstanding
exchangeable shares is less than 0.5 million. Holders of exchangeable shares
are entitled to receive dividends declared on Mattel's common stock multiplied
by 1.2 as if the exchangeable shares had been converted into common stock.
Holders of exchangeable shares vote their shares through the Special Voting
Preferred Stock at the rate of 1.2 votes per exchangeable share on all matters
on which the holders of Mattel's common stock may vote. As a result of the 1999
merger, each exchangeable share will include the right to acquire exchangeable
shares under a rights agreement issued by Softkey Software Products Inc. These
rights have an economically equivalent value to the Rights attached to Mattel's
common stock.
During the years ended December 31, 1999, 1998 and 1997, 1.9 million, 9.1
million and 0.1 million exchangeable shares, respectively, were converted by
the holders into common stock at the rate of 1.2 common shares per exchangeable
share.
In 1997 and 1998, Mattel's Canadian subsidiary, Softkey Software Products
Inc., issued 4.1 million and 8.7 million warrants in private placements in
Canada for net proceeds of $57.5 million and $134.3 million, respectively. Each
warrant was subsequently exchanged in accordance with its provisions into one
exchangeable share without additional payment during 1998.
Stock Compensation Plans
--Mattel Stock Option Plans
In 1996, the stockholders of Mattel approved the Mattel 1996 Stock Option
Plan. Under this plan, incentive stock options, nonqualified stock options,
stock appreciation rights, nonvested stock awards, and shares of common stock
may be granted to officers, key employees, and other persons providing services
to Mattel. In addition, nonqualified stock options may be granted to members of
Mattel's board of directors who are not employees of Mattel.
Generally, options are exercisable contingent upon the grantees' continued
employment with Mattel. Nonqualified stock options are granted at not less than
100% of the fair market value of Mattel's common stock on the date of grant,
generally vest at the rate of 25% per year of service, and usually expire
within ten years from the date of grant. The 1996 Stock Option Plan provides
that up to 1.5% of Mattel's outstanding common stock as of the first day of
each calendar year will be available for awards under the plan. Grants made to
individual participants cannot exceed 1.0 million shares in any single calendar
year. On February 4, 1999, Mattel's board of directors approved an amendment to
the 1996 Stock Option Plan authorizing an additional 6.0 million shares for
grant in connection with new employees of businesses acquired by Mattel. The
aggregate number of shares of common stock available for grant under the 1996
Stock Option Plan may not exceed 50.0 million shares. This plan expires on
December 31, 2005. Mattel's previous plans, the 1982 and 1990 Stock Option
Plans, expired on April 14, 1992 and December 31, 1996, respectively. All
outstanding awards under these plans continue to be exercisable under the terms
of their respective grant agreements.
In November 1999, the Compensation/Options Committee of Mattel's board of
directors approved the Mattel 1999 Stock Option Plan. Under this plan,
nonqualified stock options, stock appreciation rights and nonvested stock
awards may be granted to key employees who are not officers, directors or
consultants of
F-23
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mattel. Generally, options are exercisable contingent upon the grantee's
continued employment with Mattel. Nonqualified stock options are granted at not
less than 100% of the fair market value of Mattel's common stock on the date of
grant, and expire within ten years from the date of grant. Options granted
under the 1999 Stock Option Plan vest on a schedule determined by the
Compensation/Options Committee. Grants made in 1999 vest over three years at
six month intervals, at a rate of 10% for each six-month period during the
first year and at a rate of 20% per six month period thereafter. Grants made to
individual participants cannot exceed 1.0 million shares in any single calendar
year. The aggregate number of shares of common stock available for grant under
the 1999 Stock Option Plan may not exceed 12.8 million shares. This plan
expires on December 31, 2009.
The fair value of Mattel options granted has been estimated using the Black-
Scholes pricing model. The expected life of these options used in this
calculation has been determined using historical exercise patterns. The
following weighted average assumptions were used in determining fair value:
1999 1998 1997
----- ----- -----
Expected life (in years)................................ 3.90 3.60 3.40
Risk-free interest rate................................. 6.34% 4.61% 5.69%
Volatility factor....................................... 18.46% 15.80% 17.40%
Dividend yield.......................................... 0.84% 0.83% 0.86%
The weighted average fair value of Mattel options granted during 1999, 1998
and 1997 were $4.85, $7.32 and $4.86, respectively.
The following is a summary of stock option information and weighted average
exercise prices for Mattel's stock option plans during the year (options in
thousands):
1999 1998 1997
-------------- -------------- --------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
Outstanding at January 1......... 16,075 $27.02 17,307 $21.73 13,310 $18.05
Options granted................ 18,208 20.45 3,680 41.66 7,443 25.79
Options exercised.............. (201) 20.93 (4,284) 17.80 (2,807) 14.89
Options canceled............... (1,872) 28.14 (628) 29.79 (639) 22.44
------ ------ ------
Outstanding at December 31....... 32,210 $23.28 16,075 $27.02 17,307 $21.73
====== ====== ======
Exercisable at December 31....... 10,813 $23.89 5,645 $20.48 5,999 $16.29
====== ====== ======
Available for grant at December
31.............................. 9,234 2,358 1,072
====== ====== ======
F-24
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
for Mattel stock options outstanding as of December 31, 1999 (options in
thousands):
Options
Options Outstanding Exercisable
------------------------------------------- -------------------------
Exercise Price Remaining
Ranges Number Life Price Number Price
-------------- ------ --------- ------ ------ ------
$ 4.69 to $13.56 389 5.20 $11.59 259 $10.77
13.69 to 13.69 7,010 9.84 13.69 -- --
14.00 to 22.40 3,090 4.65 16.17 2,990 16.05
22.50 to 22.50 3,816 9.04 22.50 1 22.50
22.56 to 25.63 3,125 6.76 24.47 1,811 24.57
25.75 to 25.75 5,063 7.11 25.75 3,162 25.75
25.94 to 26.25 592 6.93 26.15 507 26.14
26.38 to 26.38 5,440 9.42 26.38 947 26.38
26.50 to 41.38 826 7.64 33.37 410 31.40
42.00 to 42.00 2,859 8.10 42.00 726 42.00
------ ------
$ 4.69 to $42.00 32,210 8.13 $23.28 10,813 $23.89
====== ======
Prior to the March 1997 merger, Tyco had various incentive and non-qualified
stock option plans that provided benefits for eligible participants. Effective
with the 1997 merger, all stock options previously granted and outstanding
under these plans were exchanged for approximately 363 thousand Mattel common
shares, which approximated the fair value of the options as of the merger
consummation date.
--Mattel 1997 Premium Price Stock Option Plan
In November 1997, the Compensation/Options Committee of the board of
directors approved the Mattel, Inc. 1997 Premium Price Stock Option Plan, which
was subsequently approved by Mattel's stockholders at the May 1998 meeting.
Under this plan, premium price options may be granted to officers and other key
employees of Mattel. Grants made to individual participants cannot exceed 4.5
million shares in any three consecutive calendar years. Grants under the 1997
Premium Price Stock Option Plan in 1997 were intended to replace annual grants
under the 1996 Stock Option Plan until the end of 2000.
The exercise price of premium price options is calculated at 25% and 33-
1/3% above Mattel's six-month average stock price prior to the date of grant.
Options are forfeited unless Mattel's common stock price reaches the premium
exercise price within two years from the date of grant for options with a 25%
premium price and within three years from the date of grant for options with a
33- 1/3% premium price. Options granted under the plan may not be exercised for
three years and expire five years from the date of grant. Each option includes
a Tandem Limited Stock Appreciation Right which gives the holder the right to
receive cash, shares of common stock or any combination of cash and common
stock upon the occurrence of a change of control as defined in the plan. On
February 4, 1999, Mattel's board of directors approved an amendment to the 1997
Premium Price Stock Option Plan authorizing an additional 3.0 million shares
for grant in connection with new employees of businesses acquired by Mattel,
bringing the aggregate number of shares of common stock available for grant
under this plan to 24.0 million. This plan expires on December 31, 2002.
F-25
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of stock option information and weighted average
exercise prices for premium price options during the year (options in
thousands):
1999 1998 1997
-------------- ------------- -------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
Outstanding at January 1........... 18,661 $44.04 17,661 $43.58 --
Options granted.................. 3,420 35.00 1,000 52.15 17,661 $43.58
Options exercised................ -- -- --
Options canceled................. (5,139) 39.71 -- --
------ ------ ------
Outstanding at December 31......... 16,942 $43.53 18,661 $44.04 17,661 $43.58
====== ====== ======
Exercisable at December 31......... -- -- --
====== ====== ======
Available for grant at December
31................................ 7,058 2,339 3,339
====== ====== ======
The fair value of premium price options granted has been estimated using the
Black-Scholes pricing model. The following assumptions were used in determining
fair value:
1999 1998 1997
----- ----- -----
Expected life (in years)................................ 5.00 5.00 5.00
Risk-free interest rate................................. 5.16% 5.80% 6.33%
Volatility factor....................................... 39.90% 25.50% 24.10%
Dividend yield.......................................... 0.89% 0.83% 0.86%
The fair value of options granted during 1999, 1998 and 1997 was $5.37,
$5.10 and $4.79 for 25% premium price options and $5.48, $4.92 and $4.86 for
33- 1/3% premium price options, respectively.
The following table summarizes information about the remaining contractual
life (in years) and the exercise prices for premium price options outstanding
as of December 31, 1999 (options in thousands):
Options Outstanding
-------------------------------------------------------------------------------------
Remaining
Number Life Price
------ --------- ------
660 4.25 $35.24
660 4.25 37.59
7,364 2.85 42.31
7,258 2.85 44.87
500 3.54 50.46
500 3.54 53.83
------
16,942 $43.53
======
--Learning Company Stock Option Plans
Prior to the May 1999 merger, Learning Company and its subsidiaries had
various incentive and nonqualified stock option plans that provided benefits
for eligible employees and non-employee directors. Effective with the 1999
merger, each outstanding option under these plans was converted into an option
to purchase 1.2 shares of Mattel common stock. The exercise price of such
options was adjusted by dividing the Learning Company option price by 1.2.
Other than options granted under some plans assumed by Learning Company in
connection with recent acquisitions, all Learning Company stock options vested
and became fully exercisable as a result of the 1999 merger.
F-26
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of Learning Company options granted prior to the 1999 merger,
and during the years ended 1998 and 1997 has been estimated using the Black-
Scholes pricing model. The expected life of these options used in this
calculation has been determined using historical exercise patterns. The
following weighted average assumptions were used in determining fair value:
1999 1998 1997
----- ----- -----
Expected life (in years)................................ 4.00 6.00 4.00
Risk-free interest rate................................. 6.35% 5.13% 6.00%
Volatility factor....................................... 51.00% 68.00% 75.00%
Dividend yield.......................................... -- -- --
The weighted average fair value of Learning Company options granted prior to
the 1999 merger, and during the years ended 1998 and 1997 were $9.83, $10.14
and $8.81, respectively.
The following is a summary of stock option information and weighted average
exercise prices for Learning Company's stock option plans during the year
(options in thousands):
1999 1998 1997
-------------- -------------- --------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
Outstanding at January 1......... 17,626 $14.30 16,396 $14.43 14,694 $18.63
Options assumed in
acquisitions.................. -- -- -- -- 860 3.98
Options granted................ 1,415 21.12 8,979 15.29 9,695 11.12
Options exercised.............. (5,278) 10.99 (4,660) 8.77 (1,489) 7.43
Options canceled............... (3,083) 15.94 (3,089) 21.70 (7,364) 16.12
------ ------ ------
Outstanding at December 31....... 10,680 $16.19 17,626 $14.30 16,396 $14.43
====== ====== ======
Exercisable at December 31....... 9,473 $15.41 6,602 $15.04 7,154 $13.05
====== ====== ======
Available for grant at December
31.............................. -- 4,709 3,270
====== ====== ======
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
for Learning Company stock options outstanding as of December 31, 1999 (options
in thousands):
Options
Options Outstanding Exercisable
------------------------------------------- -------------------------
Exercise Price Remaining
Ranges Number Life Price Number Price
-------------- ------ --------- ------ ------ ------
$ 0.58 to $ 5.63 232 6.87 $ 3.90 222 $ 3.90
6.54 to 12.92 2,026 7.54 10.87 2,016 10.88
12.97 to 23.49 7,361 7.32 15.89 6,479 15.34
24.06 to 34.51 1,025 7.14 29.38 727 29.55
79.92 to 79.92 36 0.83 79.92 29 79.92
------ -----
$ 0.58 to $79.92 10,680 7.31 $16.19 9,473 $15.41
====== =====
In March 1997, in order to provide a competitive employment environment for
staff retention and hiring, Learning Company instituted an option exchange
program under which certain employees (other than employee directors) with
options exercisable at $8.67 per share or higher were given the opportunity to
exchange such options for options with an exercise price of $8.67 per share. A
total of 4.4 million options were exchanged and have been included in the
canceled and granted totals for the year ended December 31, 1997.
F-27
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--Compensation Cost
Mattel, Tyco and Learning Company each adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized in the results of operations for nonqualified stock options granted
under these plans during the years ended December 31, 1999, 1998 and 1997. Had
compensation cost for nonqualified stock options been determined based on their
fair value at the date of grant consistent with the method of accounting
prescribed by SFAS No. 123, Mattel's net income (loss) and earnings per share
would have been adjusted as follows (amounts in millions except per share
data):
For the Year Ended
------------------------
1999 1998 1997
------- ------ -------
Net income (loss)
As reported........................................ $ (82.4) $206.1 $(182.7)
Stock option plans................................. (30.1) (67.1) (38.6)
Premium price stock option plan.................... (20.1) (21.1) --
------- ------ -------
Pro forma income (loss)........................ $(132.6) $117.9 $(221.3)
======= ====== =======
Income (loss) per share
Basic
As reported...................................... $ (0.21) $ 0.51 $ (0.52)
Stock option and premium price option plans...... (0.12) (0.17) (0.11)
------- ------ -------
Pro forma basic income (loss).................. $ (0.33) $ 0.34 $ (0.63)
======= ====== =======
Diluted
As reported...................................... $ (0.21) $ 0.47 $ (0.52)
Stock option and premium price option plans...... (0.12) (0.16) (0.11)
------- ------ -------
Pro forma diluted income (loss)................ $ (0.33) $ 0.31 $ (0.63)
======= ====== =======
The pro forma effect on Mattel's 1998 and 1997 net income is not indicative
of the pro forma effect in future years, because it does not take into
consideration the pro forma expense related to grants made prior to 1995.
Stock Subscription Warrants
In December 1999, 751.4 thousand warrants were exercised for an equal number
of common shares by the holder in accordance with the terms of the warrant
agreement. In June 1999, 114.2 thousand common shares were issued to a warrant
holder in a cashless exercise in accordance with the terms of the warrant
agreement. As of December 31, 1999, all stock subscription warrants previously
outstanding had been exercised.
Disney Warrant
In 1996, Mattel entered into a licensing agreement with Disney Enterprises,
Inc. Pursuant to this agreement, Mattel issued Disney a warrant to purchase 3.0
million shares of Mattel's common stock at an exercise price of $27.375 per
share. This warrant expires no later than April 2, 2004. The warrant's fair
value of $26.4 million was determined using the Black-Scholes pricing model,
assuming an expected life of eight years, a dividend yield of 0.88%, a risk-
free interest rate of 6.17%, and a volatility factor of 27.60%.
The fair value of the warrant is amortized as a component of royalty expense
as the related properties are introduced over the period the related revenues
are recognized. During 1999, 1998 and 1997, $5.6 million, $3.2 million and $1.1
million, respectively, was recognized in the results of operations related to
this warrant.
F-28
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Learning Company Employee Stock Purchase Plan
In December 1997, Learning Company stockholders approved the 1997 Employee
Stock Purchase Plan, which provided certain eligible employees with the
opportunity to purchase shares of common stock at a price of 85% of the price
listed on the New York Stock Exchange at various specified purchase dates. The
plan met the criteria established in SFAS No. 123 for noncompensatory employee
stock purchase plans and therefore, no compensation expense was recorded in
connection with this plan. During the years ended December 31, 1999 and 1998,
approximately 37 thousand and 56 thousand shares, respectively, were purchased
by employees under this plan. As a result of the May 1999 merger, the 1997
Employee Stock Purchase Plan was terminated.
Prior to their merger with Learning Company, Broderbund also had an employee
stock purchase plan. During the year ended December 31, 1997, approximately 62
thousand shares were purchased by employees under this plan. As a result of the
merger with Learning Company, the Broderbund employee stock purchase plan was
terminated.
Common Stock Repurchase Plan
Mattel's common stock repurchase plan, initiated in May 1990, provides for
the repurchase of common shares to fund Mattel's stock option plans. The number
of shares to be repurchased is authorized on an annual basis by the board of
directors based upon anticipated reissuance needs. During 1999, 1998, and 1997,
Mattel repurchased 4.0 million, 9.7 million, and 6.5 million shares,
respectively.
Dividends and Capital Transactions
A regular quarterly cash dividend has been declared by the Mattel board of
directors on Mattel's common stock since the second quarter of 1990. The board
of directors increased the quarterly cash dividend from $0.08 per common share
to $0.09 per common share in the second quarter of 1999. Learning Company did
not pay dividends on its common stock during 1999 prior to the May merger and
during the years ended December 31, 1998 and 1997.
Note 6--Commitments and Contingencies
Leases
Mattel routinely enters into noncancelable lease agreements for premises and
equipment used in the normal course of business. The following table shows the
future minimum obligations under lease commitments in effect at December 31,
1999 (in thousands):
Capitalized Operating
Leases Leases
----------- ---------
2000.................................................. $ 300 $ 49,000
2001.................................................. 300 37,800
2002.................................................. 300 20,500
2003.................................................. 300 15,100
2004.................................................. 300 13,900
Thereafter............................................ 9,200 10,300
------- --------
$10,700(a) $146,600
======= ========
- --------
(a) Includes $8.4 million of imputed interest.
F-29
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense under operating leases amounted to $75.2 million, $66.6
million and $71.5 million for 1999, 1998 and 1997, respectively, net of
sublease income of $0.6 million, $0.5 million and $0.3 million in 1999, 1998
and 1997, respectively.
Commitments
In the normal course of business, Mattel enters into contractual
arrangements to obtain and protect Mattel's right to create and market certain
products and for future purchases of goods and services to ensure availability
and timely delivery. Such arrangements include royalty payments pursuant to
licensing agreements and commitments for future inventory purchases. Certain of
these commitments routinely contain provisions for guaranteed or minimum
expenditures during the terms of the contracts. Current and future commitments
for guaranteed payments reflect Mattel's focus on expanding its product lines
through alliances with businesses in other industries.
The largest commitment involves Mattel's agreements with The Walt Disney
Company and Disney Enterprises, Inc. The licensing agreement with The Walt
Disney Company, which contains annual minimum royalty guarantees, permits
Mattel to use the Disney name and certain characters on preschool and infant
products through September 2002.
The agreement with Disney Enterprises, Inc. grants Mattel exclusive
worldwide rights (with certain exceptions) to produce toys based on all
children-oriented Disney television and film properties introduced. This
agreement spans three years, with Mattel having the right for up to two
additional years to market merchandise from film properties produced during the
second and third years. The initial term of the agreement may be renewed for an
additional three-year period upon mutual consent. This agreement contains
minimum royalty guarantees that are contingent upon the number and nature of
the properties introduced by Disney. Commitments for 2000 introductions are
expected to approximate $10 million payable over a three-year period. Pursuant
to the agreement, Mattel issued Disney a stock warrant, valued at $26.4
million, to purchase 3.0 million shares of Mattel's common stock.
In January 2000, Mattel and Warner Bros. Worldwide Consumer Products signed
a licensing agreement making Mattel the worldwide master toy licensee for the
literary characters from the Harry Potter books published by J.K. Rowling as
well as for feature film and television properties developed by Warner Bros.
Pictures featuring the Harry Potter characters. Mattel's worldwide toy
licensing agreement involves the first two Harry Potter books and theatrical
films. This agreement contains minimum royalty guarantees and has a term of
four years, provided that the second theatrical film is released prior to
January 1, 2003. If the second theatrical film is released subsequent to
January 1, 2003, the agreement will be extended to a date twelve months after
the release of the second theatrical film. Pursuant to the agreement, Mattel
issued Warner Bros. Consumer Products a stock warrant to purchase 3.0 million
shares of Mattel's common stock. This warrant became fully vested and
exercisable upon signing of the licensing agreement.
F-30
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Licensing and related agreements provide for terms extending from 2000
through 2007 and contain provisions for future minimum payments as shown in the
following table (in thousands):
Minimum
Payments
--------
2000................................................................ $134,000
2001................................................................ 104,000
2002................................................................ 69,000
2003................................................................ 15,000
2004................................................................ 18,000
Thereafter.......................................................... 6,000
--------
$346,000
========
Royalty expense for the years ended December 31, 1999, 1998 and 1997 was
$308.6 million, $234.2 million and $225.8 million, respectively.
As of December 31, 1999, Mattel had outstanding commitments for 2000
purchases of inventory of approximately $92 million.
Foreign Currency Contracts
To limit the exposure associated with exchange rate movements, Mattel enters
into foreign currency forward exchange and option contracts primarily as hedges
of inventory purchases, sales and other intercompany transactions denominated
in foreign currencies. These contracts generally have maturity dates of up to
18 months. Gains or losses related to firm commitments, which qualify for hedge
accounting, are deferred and are recognized in the results of operations as
part of the underlying transaction. Contracts that do not qualify for hedge
accounting are marked to market with gains and losses recognized in the results
of operations. Had Mattel not entered into hedges to limit the effect of
exchange rate fluctuations on results of operations and cash flows, 1999 pre-
tax income would have been reduced by approximately $16 million.
As of December 31, 1999 and 1998, Mattel held the following contracts to
sell foreign currencies (in thousands):
1999 1998
----------------- -----------------
Fair Fair
Amount Value Amount Value
-------- -------- -------- --------
Forwards................................. $342,370 $334,688 $392,972 $394,340
======== ======== ======== ========
Fair value for forwards reflects the amount, based on dealer quotes, Mattel
would receive at maturity for contracts involving the same currencies and
maturity dates, if they had been entered into as of year-end 1999 and 1998,
respectively.
As of December 31, 1999 and 1998, Mattel held $144.7 million and $189.1
million, respectively, of foreign currency forward exchange contracts to
purchase foreign currencies. The fair value of these contracts was $144.9
million and $201.8 million as of December 31, 1999 and 1998, respectively. Fair
value reflects the amount, based on dealer quotes, Mattel would pay at maturity
for contracts involving the same currencies and maturity dates, if they had
been entered into as of year-end 1999 and 1998, respectively.
F-31
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes Mattel's foreign currency contracts by major
currency as of December 31, 1999 and 1998 (in thousands of US dollars):
1999 1998
----------------- -----------------
Buy Sell Buy Sell
-------- -------- -------- --------
US dollar............................... $342,370 $144,703 $392,972 $189,122
Euro.................................... 92,445 253,096 -- --
British pounds sterling................. 6,316 16,679 6,548 66,856
Canadian dollar......................... 7,604 40,679 16,144 18,794
Indonesian rupiah....................... 19,455 -- 10,000 --
Japanese yen............................ -- 19,412 -- 12,501
Swiss franc............................. 14,893 -- 18,341 --
Australian dollar....................... -- 8,438 4,988 21,610
Hong Kong dollar........................ -- -- 55,829 --
French franc............................ -- -- 27,435 9,105
Italian lira............................ -- -- 20,014 68,358
German mark............................. -- -- 19,119 144,660
Spanish peseta.......................... -- -- 5,625 2,899
Dutch guilder........................... -- -- 5,079 8,086
Mexican peso............................ -- -- -- 22,000
Belgian franc........................... -- -- -- 11,641
Other (under $5,000).................... 3,990 4,066 -- 6,462
-------- -------- -------- --------
$487,073 $487,073 $582,094 $582,094
======== ======== ======== ========
In order to minimize the risk of counterparty non-performance, Mattel
executes its foreign currency forward exchange and option contracts with
financial institutions believed to be credit-worthy, generally those that
provide Mattel with its working capital lines of credit.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. 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 does not trade in financial instruments for speculative
purposes.
Litigation
Power Wheels(R) Recall and Related Matters
On October 22, 1998, Mattel announced that Fisher-Price, in cooperation with
the Consumer Product Safety Commission, would conduct a voluntary recall
involving up to 10 million battery-powered Power Wheels(R) ride-on vehicles.
The recall did not result from any serious injury, and involves the replacement
of electronic components that may overheat, particularly when consumers make
alterations to the product. The recall involves vehicles sold nationwide since
1984 under nearly 100 model names. Additionally, Fisher-Price has been notified
by the Consumer Product Safety Commission that the Commission is considering
whether Fisher-Price may be subject to a fine for delayed reporting of the
facts underlying the recall.
In the third quarter of 1998, Mattel recognized a $38.0 million pre-tax
charge related to the recall. During the second and fourth quarters of 1999,
Mattel recognized additional pre-tax charges totaling $20.0 million related to
the recall.
F-32
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Greenwald Litigation and Related Matters
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025
008) against Mattel in Superior Court of the State of California, County of Los
Angeles. Ms. Greenwald is a former employee whom Mattel terminated in July
1995. Her complaint sought $50 million in general and special damages, plus
punitive damages, for breach of oral, written and implied contract, wrongful
termination in violation of public policy and violation of California Labor
Code Section 970. Ms. Greenwald claimed that her termination resulted from
complaints she made to management concerning general allegations that Mattel
did not account properly for sales and certain costs associated with sales and
more specific allegations that Mattel failed to account properly for certain
royalty obligations to The Walt Disney Company. On December 5, 1996, Mattel's
motion for summary adjudication of Ms. Greenwald's public policy claim was
granted. On March 7, 1997, Mattel filed a motion for summary judgment on the
remaining causes of action. On December 9, 1997, Mattel's motion for summary
judgment of Ms. Greenwald's remaining claims was granted. On February 4, 1998,
Ms. Greenwald appealed from the dismissal of her suit. The appeal has been
fully briefed, and a hearing took place on March 3, 2000. Mattel intends to
continue to defend the action vigorously, including the appeal.
Toys R Us and Related Matters
On October 2, 1997, the Attorney General of the State of New York filed in
the United States District Court, Eastern District of New York (Case No. CV 97
5714), an action against Toys R Us, Mattel and certain other toy manufacturers
alleging that the defendants had violated federal antitrust laws and entered
into vertical and horizontal arrangements that had the effect of restricting
sales to the warehouse clubs. The attorneys general from forty-three other
states, the District of Columbia and the Commonwealth of Puerto Rico joined
this action. Following the filing of the New York action, a series of private
treble damage class actions under the federal antitrust laws were filed in
various federal district courts. The parties later agreed to have these related
actions transferred to the Eastern District of New York to be consolidated by
the Judicial Panel on Multiple Litigation before Nina Gershon, United States
District Judge. Private class actions were also filed in state courts in
Alabama, California, and New Jersey, asserting claims under state antitrust
law. These state court actions were coordinated with the federal court actions.
Subsequent mediation efforts resulted in a Settlement Agreement and Release
as to Mattel, Inc., Fisher-Price, and Tyco, effective April 6, 1999. Pursuant
to the terms of the Settlement Agreement and Release, Mattel agreed to make a
cash payment and a toy contribution, both of which were made in the fourth
quarter of 1999. As a result of a dispute between the parties as to the
selection of the toys to be contributed, Mattel negotiated a Supplemental Toy
Contribution Agreement and made a supplemental toy contribution in December
1999. Final Judgment and Order of Dismissal was entered by Judge Gershon on
February 17, 2000 that effectively dismissed with prejudice the claims asserted
by the state and private federal and state court plaintiffs, including the
claims of any person represented in either a parens patriae or private class
capacity.
Litigation Related to Business Combination
On December 16, 21, and 23, 1998, several stockholders of the legal entity
The Learning Company, Inc. that merged into Mattel ("Old Learning Company")
filed six separate purported class action complaints in the Court of Chancery
of the State of Delaware in and for New Castle County against Old Learning
Company and Old Learning Company's board of directors for alleged breaches of
fiduciary duties in connection with the May 1999 merger. The six complaints
were consolidated. The consolidated complaint named Mattel as an additional
defendant, claiming that Mattel aided and abetted the alleged breaches of
fiduciary duty. On March 9, 2000, the plaintiffs filed a notice and order of
dismissal dismissing the action without prejudice. Upon approval by the court,
the consolidated action will be formally dismissed.
F-33
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation Related to Learning Company Earnings Shortfall
Following Mattel's announcement on October 4, 1999 that it expected an
earnings shortfall at its Learning Company division in the third quarter of
1999, several of Mattel's shareholders filed purported class action complaints
in the United States District Court for the Central District of California, the
United States District Court for the Southern District of New York and the
United States District Court for Massachusetts naming Mattel and certain of its
officers and directors as defendants. The complaints generally allege, among
other things, that the defendants made false or misleading statements that
artificially inflated the price of Mattel's common stock by overstating the
revenues and net income of Mattel, including its Learning Company division, and
by falsely representing that the May 1999 Learning Company acquisition would be
immediately accretive to Mattel's 1999 and 2000 financial results.
Two of the purported class action complaints are brought on behalf of the
former stockholders of Broderbund who acquired shares of Old Learning Company
in exchange for their Broderbund common stock in connection with the Old
Learning Company-Broderbund merger on August 31, 1998. Mattel has been named as
a defendant as the successor-in-interest to Old Learning Company. The
complaints generally allege that that the Old Learning Company-Broderbund
Registration Statement on Form S-4 filed on or about July 14, 1998 in
connection with the merger was materially false.
On November 23, 1999, Mattel (along with other defendants named in the
federal securities lawsuits) filed a motion and brief before the Judicial Panel
on Multidistrict Litigation seeking to transfer all of the federal actions to
the United States District Court for the Central District of California for
Coordinated or Consolidated Pretrial Proceedings. On March 3, 2000, the
Judicial Panel on Multidistrict Litigation granted Mattel's motion.
In addition, a Mattel stockholder filed a derivative complaint on behalf and
for the benefit of Mattel in the Superior Court of the State of California,
County of Los Angeles. The complaint alleges 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 seeks both
monetary and injunctive relief. On February 10, 2000, the court sustained
defendants' demurrer and dismissed the complaint with leave to amend.
Mattel believes the lawsuits are without merit and intends to defend them
vigorously.
Environmental
--Fisher-Price
Fisher-Price has executed a consent order with the State of New York
involving a remedial action/feasibility study for one of its manufacturing
plants. Currently, Fisher-Price is negotiating an additional consent order
which will outline the specific clean up strategy for the site. Mattel
anticipates that the New York State Department of Environmental Quality will
issue their Record of Decision in March 2000. The ultimate liability associated
with this cleanup presently is estimated to be less than $1,425,000,
approximately $1,030,500 of which has been incurred through December 31, 1999.
F-34
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--Beaverton, Oregon
Mattel operates a manufacturing facility on a leased property in Beaverton,
Oregon that was acquired as part of the Tyco merger. In March 1998, samples of
groundwater used by the facility for process water and drinking water disclosed
elevated levels of certain chemicals, including trichloroethylene. Mattel
immediately closed the water supply and self-reported the sample results to the
Oregon Department of Environmental Quality and the Oregon Health Division.
Mattel also implemented a community outreach program to employees, former
employees and surrounding landowners.
In November 1998, Mattel and another potentially responsible party entered
into a consent order with the Oregon Department of Environmental Quality to
conduct a remedial investigation/feasibility study at the property, to propose
an interim remedial action measure and to continue the community outreach
program. In the second quarter of 1999, Mattel recorded a $14.0 million pre-tax
charge for environmental remediation costs related to this property, based on
the completion and approval of the remediation plan and feasibility study.
General
Mattel is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and labor,
which Mattel is addressing or defending in the ordinary course of business.
Management believes that any liability which may potentially result upon
resolution of such matters will not have a material adverse effect on Mattel's
business, financial condition or results of operations.
Note 7--Acquisitions and Nonrecurring Items
Business Combination with Learning Company
In May 1999, Mattel completed its merger with Learning Company, after which
Learning Company was merged with and into Mattel, with Mattel being the
surviving corporation. Each share of Learning Company Series A Preferred Stock
was converted into 20 shares of Learning Company common stock immediately prior
to the consummation of the merger. Pursuant to the merger agreement, each
outstanding share of Learning Company common stock was then converted into 1.2
shares of Mattel common stock upon consummation of the merger. As a result,
approximately 126 million Mattel common shares were issued in exchange for all
shares of Learning Company common stock outstanding as of the merger date. The
outstanding share of Learning Company special voting stock was converted into
one share of Mattel Special Voting Preferred Stock. Each outstanding
exchangeable share of Learning Company's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but upon consummation of the merger became
exchangeable for 1.2 shares of Mattel common stock.
This transaction has been accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect
retroactive restatement of the companies' combined financial position and
operating results. For periods preceding the merger, there were no material
intercompany transactions which required elimination from the combined
consolidated results of operations and there were no adjustments necessary to
conform the accounting practices of the two companies.
F-35
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected financial information for the combining entities included in the
consolidated statements of operations for the three years ended December 31,
1999 is shown below. Although the merger was effective on May 13, 1999, interim
financial information for the combining companies was not available as of that
date; therefore, information for and as of March 31, 1999 has been presented.
March Dec. 31, Dec. 31,
31, 1999 1998 1997
-------- ---------- ----------
(In thousands)
Net sales
Mattel...................................... $692,116 $4,781,892 $4,834,616
Learning Company............................ 186,843 839,315 620,931
-------- ---------- ----------
Combined.................................. $878,959 $5,621,207 $5,455,547
======== ========== ==========
Net income (loss)
Mattel...................................... $(17,856) $ 332,264 $ 285,184
Learning Company(a)(b)...................... 22,905 (126,211) (467,905)
-------- ---------- ----------
Combined.................................. $ 5,049 $ 206,053 $ (182,721)
======== ========== ==========
- --------
(a) The (benefit) provision for income taxes has been adjusted by $(0.6)
million, $20.9 million and $(27.0) million in 1999, 1998 and 1997,
respectively, to reflect the reduction of valuation allowances established
in Learning Company's historical financial statements resulting in the
recognition of estimated benefits of net operating losses incurred by
Learning Company.
(b) Net loss in 1997 has been decreased by $9.0 million to reflect the
reduction in the purchase price paid by Learning Company when it acquired
the Former Learning Company and the corresponding decrease in goodwill
amortization.
Other Business Combinations
In August 1998, Learning Company completed its merger with Broderbund, a
publisher and developer of consumer software for the home and school market.
The stock-for-stock transaction was approved by the stockholders of Broderbund,
after which Broderbund became a wholly-owned subsidiary of Learning Company.
Under the merger agreement, each outstanding share of Broderbund common stock
was converted into 0.80 shares of Learning Company common stock and resulted in
the issuance of approximately 17 million shares of Learning Company common
stock.
This transaction was accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect the
retroactive restatement of the companies' combined financial position and
operating results. The consolidated statement of stockholders' equity for the
year ended December 31, 1998 has been adjusted to include Broderbund's
unrealized gain on securities of $0.5 million (included in comprehensive
income) and net income of $0.2 million for the month ended December 31, 1997.
Broderbund's net sales and operating expenses for the month ended December 31,
1997 were $28.7 million and $28.0 million, respectively. The consolidated
statements of operations, cash flows and stockholders' equity for the years
ended December 31, 1997 have been combined with those of Broderbund for the
twelve-month period ended November 30, 1997. The consolidated statement of
stockholders' equity for the year ended December 31, 1997 has been adjusted to
include Broderbund's net income of $8.9 million for the period from September
1, 1996 through November 30, 1996.
F-36
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1997, Mattel completed its merger with Tyco, accounted for as a
pooling of interests. Under the merger agreement, each outstanding share of
Tyco common stock was converted into 0.48876 Mattel common shares and resulted
in the issuance of approximately 17 million Mattel common shares. Tyco
restricted stock units and stock options outstanding as of the merger date were
exchanged for approximately 0.6 million Mattel common shares. In addition, each
share of Tyco Series B and Series C Preferred Stock was converted into like
Mattel preferred stock. Financial information for periods prior to the merger
reflect the retroactive restatement of the companies' combined financial
position and operating results.
Learning Company also merged with Palladium Interactive, Inc. and P.F.
Magic, Inc. in 1998 and TEC Direct, Inc., Microsystems Software, Inc., Skills
Bank Corporation and Learning Services Inc. in 1997, each of which were
accounted for as poolings of interests. The consolidated financial statements
have not been retroactively restated for the results of operations and
financial position of these companies as the effect of each acquisition
individually and in the aggregate on Learning Company's balance sheet and
results of operations was less than three percent. The consolidated statements
of stockholders' equity for the years ended December 31, 1998 and 1997 have
been adjusted to include the historical results of operations of the acquired
companies of $34.6 million and $6.2 million, respectively. A total of 1.6
million and 3.8 million common shares were issued in the years ended December
31, 1998 and 1997, respectively, as a result of these mergers.
Acquisitions
Mattel acquired the following companies during the years ended December 31,
1998 and 1997. Each of these acquisitions were accounted for using the purchase
method of accounting. The results of operations of the acquired companies have
been included in Mattel's consolidated financial statements from their
respective dates of acquisition. Intercompany accounts and transactions between
the acquired companies and Mattel, as applicable, have been eliminated.
(Assets)/
Method of Liabilities Incomplete
Month Price Payment Assumed Intangibles Technology
------- ------ ---------- ----------- ----------- ----------
(In millions)
1998
Pleasant Company........ July $715.0 Cash $(25.0) $690.0 $ --
Bluebird Toys PLC....... June 80.0 Cash (20.0) 60.0 --
Sofsource, Inc.......... June 45.0 Stock 6.7 36.8 14.9
Mindscape, Inc.......... March 152.6 Cash/stock 6.4 119.0 40.0
1997
Creative Wonders,
L.L.C.................. October $ 37.8 Cash $ 7.3 $ 44.0 $ 1.1
Parsons Technology...... August 31.0 Cash (11.7) 9.3 10.0
The acquisition price includes investment advisor and other directly-related
expenses, as applicable. The portion of the purchase price allocated to
incomplete technology was charged to expense in the year of acquisition.
Mattel also made other minor acquisitions during the last three years, which
were accounted for using the purchase method. These acquisitions resulted in
the issuance of 0.4 million shares of common stock in the year ended December
31, 1997.
F-37
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Effect of 1998 Acquisitions
The unaudited pro forma results of operations for 1998 acquisitions
accounted for using the purchase method of accounting are as follows:
Acquired Pro Forma
Mattel Companies Combined
---------- --------- ----------
(In thousands, except per share
data)
1998
Net sales.................................... $5,621,207 $ 103,862 $5,725,069
Income before extraordinary item............. 206,053 (102,175) 103,878
Net income................................... 206,053 (102,175) 103,878
Basic income per share....................... 0.51 0.24
Diluted income per share..................... 0.47 0.22
1997
Net sales.................................... $5,455,547 $ 550,659 $6,006,206
Loss before extraordinary item............... (178,111) (61,827) (239,938)
Net loss..................................... (182,721) (61,827) (244,548)
Basic loss per share
Loss before extraordinary item............. (0.51) (0.65)
Net loss................................... (0.52) (0.66)
Diluted loss per share
Loss before extraordinary item............. (0.51) (0.65)
Net loss................................... (0.52) (0.66)
The amounts shown for acquired companies assumes that Mattel's 1998
acquisitions occurred on January 1, 1997. These unaudited pro forma results of
operations have been prepared for comparative purposes only and do not purport
to be indicative of the results of operations which actually would have
resulted had the acquisitions occurred on the date indicated, or which may
result in the future. Pro forma adjustments have been made to reflect the
amortization of intangible assets and goodwill capitalized as a result of the
acquisitions, incremental interest expense that would have been incurred as a
result of financing the acquisition of Pleasant Company as of January 1, 1997,
and elimination of intercompany sales and margins related to the acquisition of
Bluebird.
Restructuring and Other Charges
In 1999, Mattel incurred restructuring and other nonrecurring charges
totaling $346.0 million, approximately $265 million after-tax or $0.64 per
diluted share.
During the first quarter of 1999, Mattel incurred a nonrecurring pre-tax
charge of $3.9 million, largely related to the restructuring and integration of
acquisitions made by its Learning Company division in the fourth quarter of
1998.
During the second quarter of 1999, Mattel completed its merger with Learning
Company and finalized a previously announced plan of restructuring and
integration. These actions, along with other one-time events, resulted in a
nonrecurring pre-tax charge against operations of $345.0 million. In the fourth
quarter of 1999, Mattel incurred an additional $23.5 million charge relating to
its restructuring and integration plan and other one-time charges which had
previously not met the requirement for accrual. In addition, Mattel reversed
$26.4 million of the second quarter charge based on lower than anticipated
costs and revisions to previous estimates. The impact of these new developments
combined with the initial second quarter charge resulted in a
F-38
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
full year nonrecurring charge of $342.1 million. Of the total pre-tax charges,
approximately $278 million represents cash expenditures.
The restructuring and integration plan, expected to be substantially
complete by June 2000, provides for the consolidation and realignment of
Mattel's operations. The plan was aimed at leveraging global resources in areas
of manufacturing, marketing and distribution, eliminating duplicative functions
worldwide and achieving improved operating efficiencies. The following are the
major restructuring and integration initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of three higher cost manufacturing facilities.
Components of the restructuring and other nonrecurring charges, including
related adjustments, are as follows:
Adjustments Balance
----------------- Total Amounts Dec. 31,
Plan (Credits) Charges Charges Incurred 1999
---- --------- ------- ------- -------- --------
(In millions)
Severance and other
compensation.................. $108 $(13) $18 $113 $ (30) $ 83
Distributor, license and other
contract terminations......... 57 (2) -- 55 (45) 10
Writedown of assets............ 42 (2) -- 40 (40) --
Lease termination costs........ 22 (4) -- 18 -- 18
---- ---- --- ---- ----- ----
Total restructuring costs and
asset writedowns............ 229 (21) 18 226 (115) 111
Merger-related transaction and
other costs................... 86 (5) -- 81 (76) 5
Other nonrecurring charges..... 30 -- 5 35 (16) 19
---- ---- --- ---- ----- ----
Total restructuring, asset
writedowns and other
charges..................... $345 $(26) $23 $342 $(207) $135
==== ==== === ==== ===== ====
In the fourth quarter of 1999, Mattel adjusted its restructuring and
integration plan and other nonrecurring charges, resulting in a net reduction
of approximately $3 million. The credits to the restructuring plan of
approximately $26 million were mainly due to Mattel's recent decision not to
close certain of its marketing offices and one of its manufacturing facilities.
The remaining credits include other changes in estimates and lower than
anticipated costs compared to the previous estimates for completed components
of the plan. Approximately 900 employees will not be terminated as a result
these changes.
The fourth quarter restructuring charge of approximately $18 million relates
to the termination of an additional 150 Learning Company employees at its
domestic offices. This action was taken to further consolidate the operations
of Learning Company's domestic offices. The fourth quarter other nonrecurring
charge relates to a $4.0 million increase to the reserve for the October 1998
recall of Mattel's Power Wheels(R) vehicles and a $1.1 million additional
charge related to the Toys R Us-related antitrust litigation settlement.
F-39
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A description of the components of the restructuring charges is as follows:
Severance and other compensation costs relate to the termination of
approximately 3,300 employees around the world. Approximately 2,300 of these
employees are hourly workers located in certain of Mattel's manufacturing
facilities, of which approximately 2,200 were employed in the manufacturing
facility in Kuala Lumpur, which ceased operations in September 1999. The
remainder of the work force reductions consists of downsizing sales and
marketing groups in the US, Europe and Asia-Pacific regions as well as the
elimination of duplicate administrative personnel following the consolidation
of back-office functions, the majority of which are in Europe. As of December
31, 1999, approximately $30 million had been paid to nearly 2,700 terminated
employees. Cash severance payments will extend beyond the completion of the
workforce reductions due to the severance payment options available to affected
employees.
Mattel terminated its sponsorship agreements related to certain attractions
for a total cost of $37.5 million, inclusive of the writeoff of related
capitalized costs. The cash portion of this charge was paid as of July 1999.
Mattel also recognized a $17.5 million charge, mainly related to settlements
for termination of certain foreign distributor agreements in conjunction with
the realignment of its sales and distribution network.
Mattel's restructuring plan resulted in the impairment of certain long-lived
assets related to the operations being closed. The sum of the undiscounted
future cash flows of these assets was not sufficient to cover the carrying
amount of these assets. As a result, these long-lived assets were written down
to fair market value and will be depreciated over their remaining useful lives.
Fair value of the impaired assets was determined by either third-party
appraisals or past experience in disposing of similar assets. Buildings and, to
the extent possible, equipment will be sold while the remainder of the impaired
assets will be abandoned when taken out of service. Nearly all of the revenue-
generating activities related to these assets will continue as a result of more
effective utilization of other assets. A significant portion of the fixed asset
writedowns is concentrated in the Operations and Learning Company segments. In
addition, other asset writeoffs include approximately $10 million of goodwill
related to a recently acquired software business, which was closed following
the merger with Learning Company.
Lease termination costs include penalties imposed upon canceling existing
leases and future obligations under long-term rental agreements at facilities
being vacated following the merger and realignment.
Merger-related transaction costs consist of investment banking fees, legal,
accounting and printing costs, registration fees and other costs recognized in
connection with the merger. Also included in this amount is the contractual
change of control payments arising from the merger. The majority of all merger-
related transaction costs were paid during the second quarter of 1999.
In 1998 Learning Company incurred restructuring charges related to the
integration of the business operations of Broderbund and Mindscape, Inc. as a
result of their respective acquisitions.
In 1997 Mattel incurred restructuring and integration charges related to the
integration of the business operations of Tyco as a result of its acquisition
and further restructuring of the business operations of Mattel. In 1997
Learning Company also incurred charges related to the integration of the
business operations of Creative Wonders, L.L.C., Learning Services, Inc.,
Skills Bank Corporation, Microsystems Software, Inc. and TEC Direct, Inc. as a
result of their respective acquisitions.
F-40
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Nonrecurring Charges
In the third quarter of 1998, Mattel recognized a $38.0 million pre-tax
charge related to a voluntary recall of certain Power Wheels(R) ride-on
vehicles. During the second and fourth quarters of 1999, Mattel recognized an
additional pre-tax charge totaling $20.0 million related to the recall.
In the second quarter of 1999, Mattel recorded a $14.0 million pre-tax
charge for environmental remediation costs related to a manufacturing facility
on a leased property in Beaverton, Oregon, based on the completion and approval
of the remediation plan and feasibility study.
In the fourth quarter of 1998, Mattel recognized a $6.0 million pre-tax
charge related to the settlement of the Toys R Us-related antitrust litigation.
In the fourth quarter of 1999, Mattel recognized an additional $1.1 million in
connection with this matter. Mattel made all required cash and toy
contributions during the fourth quarter of 1999.
Charge for Incomplete Technology
The charge for incomplete technology for the years ended December 31, 1998
and 1997 relates to products being developed by acquired companies at the time
of their acquisitions. In each case, Learning Company believed such products
had not yet reached technological feasibility, had no future alternative use as
of the date of acquisition, and required additional development to complete the
software technology and products. In order to develop the acquired incomplete
technology into commercially viable products, Learning Company was required to
complete the development of proprietary code, development of the artistic and
graphic works, and design of the remaining storyboards. During the two year
period ended December 31, 1999, Learning Company spent a total of approximately
$25 million to complete the development of acquired incomplete technology
related to 1998 acquisitions. In order to complete the development of acquired
incomplete technology, Learning Company spent approximately $0.5 million in
1998 related to 1997 acquisitions.
Note 8--Segment Information
In the 1998 fourth quarter, Mattel adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement supersedes Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of a Business Enterprise,
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of Mattel's reportable segments. This statement requires disclosure of
certain information by reportable segment, geographic area and major customer.
The tables below present information about segment revenues, operating
profit and assets. Mattel's reportable segments are separately managed business
units and include toy marketing, toy manufacturing, and consumer software sales
and development. The Toy Marketing segment is divided on a geographic basis
between domestic and international. The domestic Toy Marketing segment is
further divided into USA Toys, US Fisher-Price/Tyco Preschool and Other. USA
Toys principally sells products in the Girls, Entertainment and Wheels
categories. US Fisher-Price/Tyco Preschool principally sells products in the
Infant and Preschool categories. The Other segment principally sells specialty
products in the Girls category. The International Toy Marketing segment sells
products in all toy categories. The Consumer Software segment consists of
educational, productivity and entertainment software products developed and
sold by Learning Company on a worldwide basis. The Operations segment
manufactures toy products, which are sold to the Toy Marketing segments based
on intercompany transfer prices. Such prices are based on manufacturing costs
plus a profit
F-41
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
margin. Segment revenues do not include sales adjustments such as trade
discounts and other allowances. However, such adjustments are included in the
determination of segment profit from operations. Segment profit from operations
represents income before restructuring and other charges, interest expense, and
provision for income taxes. The consolidated total profit from operations
presented in the following tables represents income before income taxes and
extraordinary item as reported in the consolidated statements of operations.
The segment assets are comprised of accounts receivable and inventories, net of
applicable reserves and allowances.
For the Year
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(In thousands)
Revenues
Toy Marketing
USA Toys........................... $ 2,199,329 $ 2,207,018 $ 2,330,658
US Fisher-Price/Tyco Preschool..... 941,208 902,018 1,030,906
Other ............................. 316,902 256,089 58,330
International...................... 1,596,449 1,712,509 1,733,605
Learning Company..................... 770,488 839,315 620,931
Operations........................... 1,426,167 1,488,502 1,554,047
----------- ----------- -----------
Segment total.................... 7,250,543 7,405,451 7,328,477
Elimination of intersegment sales.... (1,426,167) (1,486,320) (1,552,029)
Sales adjustments.................... (309,426) (297,924) (320,901)
----------- ----------- -----------
Net sales........................ $ 5,514,950 $ 5,621,207 $ 5,455,547
=========== =========== ===========
For the Year
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
Operating Profit (Loss)
Toy Marketing
USA Toys.................................. $ 322,755 $ 348,142 $ 478,579
US Fisher-Price/Tyco Preschool............ 105,519 97,813 87,742
Other .................................... 5,433 20,235 7,300
International............................. 112,222 156,207 218,659
Learning Company............................ (205,472) 114,344 (312,478)
Operations.................................. 223,952 151,905 144,058
--------- --------- ---------
Segment total........................... 564,409 888,646 623,860
Restructuring and other charges............. (345,996) (157,314) (343,606)
Charge for incomplete technology............ -- (56,826) (20,300)
Interest expense............................ (151,609) (128,468) (112,612)
Corporate and other......................... (177,547) (154,406) (146,126)
--------- --------- ---------
Income (loss) before income taxes....... $(110,743) $ 391,632 $ 1,216
========= ========= =========
F-42
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of Year End
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Assets
Toy Marketing
USA Toys............................. $ 570,892 $ 571,976 $ 588,154
US Fisher-Price/Tyco Preschool....... 230,237 279,773 337,680
Other ............................... 96,538 71,575 --
International........................ 566,203 602,063 538,099
Learning Company....................... 302,818 226,913 201,309
Operations............................. 60,796 88,613 73,048
---------- ---------- ----------
Segment total...................... 1,827,484 1,840,913 1,738,290
Corporate and other.................... (13,183) (46,592) (16,721)
---------- ---------- ----------
Accounts receivable and
inventories, net.................. $1,814,301 $1,794,321 $1,721,569
========== ========== ==========
For the Year
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Depreciation/Amortization*
Toy Marketing
USA Toys......................................... $ 75,745 $ 61,510 $ 51,358
US Fisher-Price/Tyco Preschool................... 38,673 41,376 43,926
Other ........................................... 27,912 14,071 --
International.................................... 52,366 49,234 45,024
Learning Company................................... 51,820 97,779 464,086
Operations......................................... 28,859 25,629 32,145
-------- -------- --------
Segment total.................................. 275,375 289,599 636,539
Corporate and other................................ 23,224 23,085 17,458
-------- -------- --------
Depreciation and amortization.................. $298,599 $312,684 $653,997
======== ======== ========
- --------
* Included in depreciation and amortization are charges for tooling. Such
charges are allocated among segments based on a percentage of relative
sales.
F-43
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Toy Marketing segments sell a broad variety of children's toy products,
which are grouped into four major categories: Girls, Infant and Preschool,
Entertainment and Wheels. Learning Company is a leading publisher of consumer
software for the personal computer. The table below presents revenues from
external customers by category:
For the Year
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Girls.................................... $2,082,841 $2,136,354 $2,217,400
Infant and Preschool..................... 1,635,286 1,684,196 1,739,900
Wheels................................... 759,813 714,506 590,700
Entertainment............................ 531,540 479,891 421,700
Other.................................... 44,408 64,869 185,817
---------- ---------- ----------
5,053,888 5,079,816 5,155,517
Sales adjustments........................ (309,426) (297,924) (320,901)
---------- ---------- ----------
Toy category........................... 4,744,462 4,781,892 4,834,616
Learning Company......................... 770,488 839,315 620,931
---------- ---------- ----------
Consolidated total....................... $5,514,950 $5,621,207 $5,455,547
========== ========== ==========
The tables below present information by geographic area. Revenues are
attributed to countries based on location of customer. Long-lived assets
principally include net property, plant and equipment, and goodwill.
For the Year
--------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Net Sales
United States............................... $3,983,217 $3,998,823 $3,770,540
International............................... 1,531,733 1,622,384 1,685,007
---------- ---------- ----------
Consolidated total.......................... $5,514,950 $5,621,207 $5,455,547
========== ========== ==========
As of Year End
--------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Long-Lived Assets
United States............................... $1,477,202 $1,580,625 $ 770,147
International............................... 675,202 635,238 518,198
---------- ---------- ----------
2,152,404 2,215,863 1,288,345
Corporate and other......................... 257,786 245,985 229,625
---------- ---------- ----------
Consolidated total.......................... $2,410,190 $2,461,848 $1,517,970
========== ========== ==========
F-44
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit is granted to customers on an unsecured basis, and generally provides
for extended payment terms, which result in a substantial portion of trade
receivables being collected during the latter half of the year. Mattel's two
largest customers accounted for the following percentage of consolidated net
sales and net accounts receivable:
1999 1998 1997
---- ---- ----
Worldwide sales for the year ended............................ 33% 28% 30%
Accounts receivable as of December 31......................... 27% 26% 36%
F-45
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ---------- ---------- ----------
(In thousands, except per share amounts)
Year Ended December 31, 1999(a)
Net sales........................ $878,959 $1,040,154 $1,825,247 $1,770,590
Gross profit..................... 438,497 512,501 867,286 782,756
Advertising and promotion ex-
penses.......................... 116,759 136,475 296,436 396,285
Other selling and administrative
expenses........................ 259,494 245,134 331,934 354,353
Amortization of intangibles...... 23,009 19,419 22,765 26,654
Restructuring and other
charges(b)...................... 3,889 345,000 -- (2,893)
Other income, net................ (4,038) (3,961) (846) (5,694)
Income (loss) before income tax-
es.............................. 10,254 (261,880) 175,978 (35,095)
Net income (loss)................ 5,049 (204,334) 135,333 (18,421)
Preferred stock dividend require-
ments........................... (1,990) (1,990) -- --
Net income (loss) applicable to
common shares................... 3,059 (206,324) 135,333 (18,421)
Basic income (loss) per common
share:
Net income (loss).............. $ 0.01 $ (0.50) $ 0.32 $ (0.04)
Weighted average number of com-
mon shares.................... 396,480 409,040 425,148 425,680
Diluted income (loss) per common
share:
Net income (loss).............. $ 0.01 $ (0.50) $ 0.32 $ (0.04)
Weighted average number of
common and common equivalent
shares........................ 422,264 409,040 429,455 425,680
Dividends declared per common
share........................... $ 0.08 $ 0.09 $ 0.09 $ 0.09
Common stock market price:
High........................... $ 27.81 $ 29.00 $ 26.69 $ 16.88
Low............................ 21.50 22.88 19.00 11.81
Year Ended December 31, 1998(a)
Net sales........................ $884,500 $1,033,509 $1,884,843 $1,818,355
Gross profit..................... 439,888 509,240 996,090 968,085
Advertising and promotion ex-
penses.......................... 119,175 135,030 281,726 381,734
Other selling and administrative
expenses........................ 242,092 263,402 278,059 361,248
Amortization of intangibles...... 49,600 33,091 20,674 26,324
Charge for incomplete
technology(c)................... 40,000 16,826 -- --
Restructuring and other
charges(d)...................... 15,230 20,887 97,088 24,109
Other (income) expense, net(e)... (2,147) (7,922) 8,870 (11,893)
Income (loss) before income tax-
es.............................. (47,156) 29,757 267,327 141,704
Net income (loss)................ (55,957) 4,578 168,734 88,698
Preferred stock dividend require-
ments........................... (1,990) (1,990) (1,990) (1,990)
Net income (loss) applicable to
common shares................... (57,947) 2,588 166,744 86,708
Basic income (loss) per common
share:
Net income (loss).............. $ (0.15) $ 0.01 $ 0.42 $ 0.22
Weighted average number of com-
mon shares.................... 376,364 384,596 399,218 397,237
Diluted income (loss) per common
share:
Net income (loss).............. $ (0.15) $ 0.01 $ 0.39 $ 0.20
Weighted average number of
common and common equivalent
shares........................ 376,364 423,407 435,123 424,296
Dividends declared per common
share........................... $ 0.07 $ 0.08 $ 0.08 $ 0.08
Common stock market price:
High........................... $ 45.63 $ 43.63 $ 42.31 $ 39.63
Low............................ 35.63 36.00 28.00 21.69
- --------
(a) Financial information for first quarter 1999 and full year 1998 has been
restated retroactively for the effects of the May 1999 merger with Learning
Company, accounted for as a pooling of interests.
F-46
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Represents integration and restructuring charges in the second quarter of
1999 related to the Learning Company merger, and other nonrecurring
charges. The nonrecurring credit for the fourth quarter of 1999 represents
net adjustments made to the restructuring and nonrecurring charges recorded
in the second quarter of 1999.
(c) Primarily represents the writeoff of products being developed by Mindscape,
Inc. and Sofsource, Inc. that had not reached technological feasibility as
of the dates of their acquisitions in the first and second quarters of
1998, respectively. These products had no alternative future use and
additional development costs would have been required to complete the
software technology.
(d) Includes restructuring charges in the third quarter related to the merger
with Broderbund, a nonrecurring charge in the third quarter related to a
voluntary recall of certain Power Wheels(R) ride-on vehicles, and a one-
time charge in the fourth quarter in connection with the Toys R Us-related
antitrust litigation settlement, which reduced diluted earnings per share
by $0.06 and $0.01, respectively.
(e) Includes unrealized foreign currency exchange losses in the third quarter
that were partially recovered in the fourth quarter.
Note 10--Supplemental Financial Information
As of Year End
---------------------
1999 1998
---------- ----------
(In thousands)
Inventories include the following:
Raw materials and work in process..................... $ 48,569 $ 48,473
Finished goods........................................ 495,727 595,797
---------- ----------
$ 544,296 $ 644,270
========== ==========
Prepaid expenses and other current assets include the
following:
Deferred income taxes................................. $ 91,545 $ 215,370
Other................................................. 239,157 156,402
---------- ----------
$ 330,702 $ 371,772
========== ==========
Intangibles, net include the following:
Goodwill.............................................. $1,274,643 $1,335,183
Other................................................. 118,672 149,451
---------- ----------
$1,393,315 $1,484,634
========== ==========
Other assets include the following:
Deferred income taxes................................. $ 296,805 $ 55,342
Other................................................. 267,381 208,982
---------- ----------
$ 564,186 $ 264,324
========== ==========
Short-term borrowings include the following:
Notes payable......................................... $ 121,805 $ 121,006
Commercial paper...................................... 247,744 78,000
---------- ----------
$ 369,549 $ 199,006
========== ==========
Accrued liabilities include the following:
Advertising and promotion............................. $ 186,558 $ 164,543
Restructuring and other charges....................... 170,845 85,623
Royalties............................................. 109,399 112,839
Other................................................. 359,072 385,832
---------- ----------
$ 825,874 $ 748,837
========== ==========
F-47
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Selling and administrative expenses include the
following:
Research and development.......................... $207,664 $274,820 $246,337
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................ $147,530 $124,087 $124,234
Income taxes.................................... 79,099 102,163 113,496
Noncash investing and financing activities:
Common stock issued for acquisitions:
Settlement of earn-out agreements............. $ 5,547 $ 5,572 $ 2,023
Sofsource, Inc. .............................. -- 45,000 --
Mindscape, Inc. .............................. -- 30,000 --
Other......................................... -- -- 7,321
Conversion of 5 -1/2% Notes..................... -- 96,695 202,033
Conversion of 7% Notes.......................... -- -- 16,034
Increase in paid-in capital due to value of in-
the-money employee stock options acquired in
connection with acquisitions................... -- -- 2,969
Note 11--New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. Mattel is required to adopt this statement
for its fiscal year beginning January 1, 2001. Management believes the adoption
of this statement will not have a material impact on Mattel's consolidated
financial position or results of operations.
F-48
SCHEDULE II
MATTEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
(In thousands)
Balance
at Additions Balance
Beginning Charged to Net at End
of Year Operations Deductions of Year
--------- ---------- ------------ --------
Allowance for Doubtful Accounts
Year Ended December 31, 1999.... $125,077 $386,497 $(282,339)(a) $229,235
Year Ended December 31, 1998.... 78,380 161,804 (115,107)(a) 125,077
Year Ended December 31, 1997.... 63,811 104,695 (90,126)(a) 78,380
Allowance for Inventory
Obsolescence
Year Ended December 31, 1999.... $ 70,169 $ 58,298 $ (82,139)(b) $ 46,328
Year Ended December 31, 1998.... 46,610 69,842 (46,283)(b) 70,169
Year Ended December 31, 1997.... 46,753 56,180 (56,323)(b) 46,610
- --------
(a) Includes write-offs, recoveries of previous write-offs, and currency
translation adjustments. Increase in additions charged to operations from
1998 to 1999 is due to bad debt expense recorded by Learning Company
related to certain of its distributors. Increase in net deductions from
1998 to 1999 is due to transfers to legal reserve for insolvent customers.
Increase in net deductions from 1997 to 1998 is due to beginning balances
from acquired companies and transfers to legal reserve for insolvent
customers.
(b) Primarily represents relief of previously established reserves resulting
from the disposal of related inventory, raw materials, write-downs and
currency translation adjustments, partially offset by beginning balances
from acquired companies.
S-1