Exhibit 13.0
CONTENTS
--------
Mattel, Inc. and Subsidiaries
FINANCIAL INFORMATION
---------------------
Five-Year Financial Summary Page 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 27
Consolidated Financial Statements Page 32
Notes to Consolidated Financial Statements Page 37
Management Report on Responsibility for Financial Page 51
Reporting
Report of Independent Accountants Page 51
CORPORATE INFORMATION
---------------------
Directors and Officers Page 52
Corporate Information Page 53
FIVE-YEAR FINANCIAL SUMMARY
---------------------------
Mattel, Inc. and Subsidiaries
For the Year (a)(b)
----------------------------------------------------------
(In thousands, except per share and percentage information) 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------
Operating Results:
Net sales $3,205,025 $2,704,448 $2,563,525 $2,046,489 $1,497,312
Gross profit 1,601,503 1,326,267 1,239,308 973,402 716,153
% of net sales 50% 49% 48% 48% 48%
Operating profit before restructuring and
integration charges (c) 521,081 414,260 351,661 278,660 193,411
% of net sales 16% 15% 14% 14% 13%
Restructuring and integration charges (d) 72,000 115,000 - - -
Income before income taxes, extraordinary item
and cumulative effect of changes in
accounting principles 393,632 236,646 282,945 214,326 143,482
Provision for income taxes 137,800 100,735 98,104 80,288 47,900
Income before extraordinary item and
cumulative effect of changes in
accounting principles 255,832 135,911 184,841 134,038 95,582
Extraordinary item - loss on debt retirement - (14,681) - (5,236) -
Cumulative effect of changes in accounting principles - (4,022) - - -
Net income 255,832 117,208 184,841 128,802 95,582
Income Per Common Share (e):
Income before extraordinary item and cumulative effect
of changes in accounting principles
Primary 1.12 0.62 0.84 0.71 0.60
Fully diluted 1.11 0.60 0.81 0.69 0.59
Net income
Primary 1.12 0.53 0.84 0.68 0.60
Fully diluted 1.11 0.52 0.81 0.66 0.59
Dividends declared per common share (e) 0.19 0.15 0.12 0.07 0.03
- ----------------------------------------------------------------------------------------------------------------------
As of Year End (a)(b)
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(In thousands) 1994 1993 1992 1991 1990
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Financial Position:
Cash and marketable securities $ 259,681 $ 523,581 $ 327,807 $ 290,750 $ 204,349
Accounts receivable, net 762,024 580,313 538,444 467,266 266,424
Inventories 339,143 219,993 238,895 225,411 152,134
Total assets 2,459,026 2,000,077 1,712,675 1,564,832 968,688
Notes payable - - 13,401 29,733 1,000
Long-term liabilities 457,455 398,939 434,930 353,575 229,070
Shareholders' equity 1,085,690 817,809 748,356 664,254 336,586
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<FN>
(a) Consolidated financial information for 1993, 1992 and 1991 has been restated retroactively for the effects
of the November 1993 merger, accounted for as a pooling of interests, with Fisher-Price. The results of
operations and financial position of Fisher-Price are excluded from periods prior to July 1, 1991, when
its business was operated as a division of The Quaker Oats Company (Note 7).
(b) The Company's financial reporting year ended on December 31 for years 1991 through 1994 and on the last
Saturday of December for 1990.
(c) Represents income from operations before restructuring charges, interest expense and provision for income
taxes.
(d) In 1994, amount represents a nonrecurring charge principally related to the consolidation of manufacturing
operations and the reduction of headquarters expense and support functions worldwide. In 1993, the
nonrecurring charge represents transaction, integration and restructuring costs related to the merger
with Fisher-Price.
(e) Per share data reflect the retroactive effect of stock splits distributed to shareholders in January 1995
and 1994, June 1992 and November 1991 and the mergers with Fisher-Price and IGI in 1993 and 1992, respectively.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
----------------------------------
Mattel, Inc. and Subsidiaries
This analysis should be read in conjunction with the consolidated financial
statements which begin on page 32.
Mattel's financial performance reflects the Company's solid growth in
1994, demonstrating continued strength in its core brands, as well as
incremental volume provided through expansion of its international
marketing and distribution network and increased manufacturing efficiency.
The Company's long-term business strategies have resulted in another record
year for sales and earnings, with net sales for 1994 of $3.2 billion and
net income for 1994 of $255.8 million. Mattel's merger with Fisher-Price,
Inc. ("Fisher-Price") completed in the fourth quarter of 1993, and the
recent acquisitions of the Kransco business and J.W. Spear & Sons PLC
("Spear"), completed in the second and third quarters of 1994,
respectively, should continue to enhance the Company's position as a
worldwide leader in the manufacturing and marketing of children's toys.
Core brands, which historically have provided the Company with
relatively stable growth, include BARBIE doll products, FISHER-PRICE toys
and juvenile products, Disney-licensed toys, HOT WHEELS vehicles and
playsets, large dolls, preschool toys including SEE 'N' SAY toys, and the
UNO and SKIP-BO card games. The Company's acquisitions of Kransco and
Spear have provided Mattel with additional core consumer franchises
represented by the POWER WHEELS line of battery-powered, ride-on vehicles
and the rights to the SCRABBLE game in markets outside of the United States
and Canada.
RESULTS OF OPERATIONS
- ---------------------
The following is a percentage analysis of operating results for the past
three years:
For the Year
----------------------------------
1994 1993 1992
- ---------------------------------- ---------- ---------- ----------
Net sales 100% 100% 100%
========== ========== ==========
Gross profit 50 49 48
Advertising and promotion
expenses 16 16 16
Other selling and administrative
expenses 17 18 18
Restructuring and integration
charges 2 4 -
Other expense, net 1 - -
---------- ---------- ----------
Operating profit 14 11 14
Interest expense 2 2 3
---------- ---------- ----------
Income before income taxes,
extraordinary item and changes
in accounting principles 12% 9% 11%
========== ========== ==========
1994 COMPARED TO 1993
- ---------------------
Net sales increased $500.6 million or 19% over 1993, reflecting strong
growth in worldwide sales of core products, as well as POLLY POCKET toys,
Nickelodeon-licensed toys, and MIGHTY MAX action figures. Added volume was
also generated by the acquisitions of Kransco and Spear, which contributed
$178.7 million in the aggregate to net sales during 1994. Excluding the
Kransco and Spear acquisitions, the Company's worldwide net sales increased
$321.9 million or 12%.
Worldwide sales of core products represented 84% of total revenues in
1994 compared to 86% for the prior year, largely as a result of strong non-
core product sales. Core brand sales increased 16% over the prior year,
with gross sales of BARBIE and BARBIE-related products exceeding $1.1
billion in volume. Sales of Disney-licensed products, led by toys
connected with "The Lion King" motion picture, increased by 33% to $441.9
million. Fisher-Price contributed $828.2 million to gross sales in 1994
compared to $747.9 million in 1993, and HOT WHEELS brand sales grew by 18%
over 1993 volumes. These increases were partially offset by a continuing
decline in sales in the large doll segment, which were 27% below the prior
year volume.
Sales to customers in the United States were 59% of 1994 consolidated
revenues compared to 60% in the prior year. In total, domestic sales
increased 17%, partially attributable to incremental volume generated from
the acquisition of Kransco, which represented 6% of the Company's domestic
sales for 1994. Total international sales increased 20% compared to 1993,
including the $24.0 million favorable effect of the weakening of the U.S.
dollar relative to last year. At constant foreign currency exchange rates,
sales outside the United States grew 19%.
Gross profit as a percentage of net sales increased one percentage
point to 50%, primarily due to higher sales volume, improved product mix
and synergies realized as a result of the integration of Fisher-Price.
Advertising and promotion expenses increased slightly as a percentage of
net sales; however, spending increased $89.8 million in support of the
growth in sales volume, new product introductions, further development of
markets internationally and the acquisitions of Kransco and Spear, which
contributed $16.3 million to the advertising growth. As a percentage of
net sales, other selling and administrative expenses decreased from 18% to
17%, reflecting the Company's ongoing efforts to manage expense growth
relative to revenue growth. In total, selling and administrative expenses
increased by $63.0 million mainly due to the acquisitions of Kransco and
Spear, which contributed $22.1 million to the increase. Other expense,
net,
27
increased $15.6 million, primarily due to the effect of the Mexican
peso devaluation in the fourth quarter and higher goodwill amortization
arising from the Kransco and Spear acquisitions in 1994, partially offset
by higher 1993 charges related to losses on sales of fixed assets.
Interest expense decreased $7.2 million over the prior year as a
result of the prepayment of Fisher-Price's 10.69% term loan, and interest
savings generated by the conversion of the 8% Debentures to common stock
during the 1994 first quarter, partially offset by increased seasonal
borrowings to finance the acquisitions of Kransco and Spear.
In the 1994 fourth quarter, the Company recognized a $72.0 million
pre-tax charge against continuing operations in connection with the
consolidation of manufacturing operations and the reduction of headquarters
expense and support functions worldwide. After related tax effects, the
net $46.8 million charge impacted 1994 earnings by $0.21 per share on a
fully diluted basis. In the 1993 fourth quarter, the Company reported a
$115.0 million pre-tax charge against continuing operations in connection
with its merger with Fisher-Price. After related tax effects, the net
$90.4 million charge impacted 1993 earnings by $0.40 per share on a fully
diluted basis.
The restructuring charges in 1994 included approximately $36 million
related to severance costs from elimination of approximately 1,000
positions, $15 million of restricted stock awards that related to the
Fisher-Price integration, $14 million for termination of various
distribution and lease agreements, $4 million for the writedown of fixed
assets to their net realizable value in connection with the elimination of
excess manufacturing capacity, and other costs of $3 million.
Although no assurance can be given, the Company anticipates the
restructuring will provide pre-tax cost savings of approximately $25
million during 1995, principally as a result of creating efficiencies and
eliminating redundancies. Available cash reserves and cash flow generated
from normal business operations will fund the costs of the restructuring,
with no adverse impact expected on the Company's future liquidity, revenues
or financial position. It is anticipated that substantially all amounts
related to the restructuring will be expended during 1995.
As of December 31, 1994, the integration and restructuring activity
provided for by the 1993 charge was substantially complete and amounts
previously accrued had been paid. The cost savings realized by the Company
as a result of the consolidation of facilities and related staff reductions
were comparable to the anticipated $45 million, and the type and amount of
charges actually incurred approximated the amounts included in the
provision.
The 1993 fourth quarter included an extraordinary net-of-tax charge of
$14.7 million resulting from prepayment of Fisher-Price's 10.69% term loan.
1993 COMPARED TO 1992
- ---------------------
Net sales increased $140.9 million or 5% over 1992. In addition to growth
in core product sales, incremental volume was contributed by sales of
Nickelodeon-licensed toys and new product introductions such as BABY WALK
'N ROLL, MIGHTY MAX, SALLY SECRETS and the Company's line of McDonald's
activity toys. The growth in worldwide net sales includes unfavorable
foreign currency impacts of $104.1 million and a $57.5 million decrease in
Nintendo volume as a result of terminations of the Company's
distributorship agreements for Nintendo products in Australia in the 1993
fourth quarter and in Canada and Italy during the first and third quarters
of 1992, respectively.
Worldwide sales of core products represented 86% of total revenues for
both 1993 and 1992. In total, core brand sales increased 6% over the prior
year, with sales of BARBIE products exceeding $1.0 billion in volume.
Fisher-Price sales totaled $747.9 million in 1993 compared to $725.0
million in 1992. Die-cast sales increased 24% and Disney-licensed product
sales were 19% higher than year-ago levels. These increases were partially
offset by a continuing decline in the large doll segment, which was 29%
below the prior year. Domestic sales grew 7%, and represented 60% of
worldwide gross revenues in 1993 compared to 59% in the prior year. Sales
internationally increased 4%, reflecting the unfavorable impacts of foreign
currency translation and the terminations of the distributorship agreements
for Nintendo products. At constant rates of exchange, international
revenues increased 15% over the prior year. Excluding Nintendo,
international sales grew 10% over 1992, or by 21% at constant rates of
exchange.
As a percentage of net sales, gross profit increased one percentage
point due to higher sales volume and an improved product mix. Advertising
and promotion expenses, while constant as a percentage of net sales,
increased $23.3 million over 1992 levels in support of increased sales of
core brands and new product introductions. The Company's expansion of its
marketing operations and manufacturing facilities resulted in a net
increase in other selling and administrative expenses of $2.2 million as
compared to the prior year, which included the effect of a $15.0 million
pre-tax charge to the provision for doubtful accounts related to the
bankruptcy of Child World and deteriorating financial condition of Lionel
Leisure. Other expense, net, decreased slightly, principally as a result
of gains on foreign currency transactions which were partially offset by
amortization of goodwill and losses on routine dispositions of fixed
assets.
Interest expense decreased $6.1 million or 9%, reflecting a general
decline in interest rates and lower levels of short-term bank borrowing,
partially offset by interest on the 6-7/8% Senior Notes issued in August
1992 and the 6-3/4% Senior Notes issued in May 1993.
In the 1993 fourth quarter, the Company recognized a $115.0 million
pre-tax charge against continuing operations in connection with its merger
with Fisher-Price. Of the total, approximately $17 million represented
transaction costs of the merger, including investment banking, legal,
accounting and related costs, and $30 million was related to
28
the severance of key Fisher-Price executives. Following the merger, the
Company commenced restructuring and integrating certain of the domestic
and international business operations of the entities. Of the estimated
integration and restructuring costs of $68 million, approximately $13
million represented writedowns of fixed assets in connection with the
elimination of duplicative administration and plant facilities. The
remainder represented expenditures related to the combination of the
entities' worldwide business operations, including staff reductions and
outplacement expenses, costs of terminating contracts with lessors and
distributors and fees paid to consultants in connection with the
integration and restructuring process. After related tax effects, the net
$90.4 million charge impacted 1993 earnings by $0.40 per share on a
fully diluted basis.
Following the merger, the Company negotiated an agreement with the
lenders to permit prepayment of Fisher-Price's 10.69% term loan. The
prepayment resulted in an extraordinary net-of-tax charge in the 1993
fourth quarter of $14.7 million, or $0.06 per fully diluted share, for the
prepayment premium and write-off of unamortized issuance costs.
INCOME TAXES
- ------------
The effective income tax rates for 1994 and 1993 were 35.0% and 42.6%,
respectively. The decrease in the effective rate for 1994 resulted from a
reduction in nondeductible restructuring costs, increased taxable income
earned in locations with relatively lower tax rates, and an increase in the
U.S. tax benefit of foreign tax credits associated with dividends from
subsidiaries located in higher tax rate countries.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which replaced
---------------------------
Statement No. 96. Upon adoption, a deferred income tax asset of $69.0
million was recorded, of which $16.0 million related to postquasi-
reorganization net operating losses carried forward, and $53.0 million
related principally to future tax deductions, and foreign tax credit and
alternative minimum tax credit carryovers resulting from activities prior
to the quasi-reorganization. The benefit of $16.0 million (or $0.07 per
fully diluted share in the 1993 first quarter) was recognized in after-tax
earnings as the cumulative effect of a change in accounting principle. The
remaining $53.0 million was credited to additional paid-in capital in
accordance with the required accounting treatment for transactions
resulting from activities prior to the quasi-reorganization.
FINANCIAL POSITION
- ------------------
The Company's financial position remained strong in 1994 as a result of its
profitable operating results. At December 31, 1994, the Company's cash
position, including marketable securities, was $259.7 million, compared to
$523.6 million as of the prior year. The decrease was primarily due to the
acquisitions of Kransco and Spear, and the prepayment of Fisher-Price's
long-term debt in January 1994, partially offset by the issuance of $110.5
million of Medium-Term Notes in the 1994 fourth quarter and cash generated
from increased sales activity. The Company's working capital remained
strong at $627.6 million.
Accounts receivable increased $181.7 million over the prior year
level, reflecting increases in fourth quarter sales volume, as well as the
addition of Kransco and Spear receivables totaling $76.8 million.
Inventories increased 54% compared to the prior year, which includes a
combined $26.2 million increase as a result of the Kransco and Spear
acquisitions, as well as new affiliates and the Company's production in
support of future sales volume.
Intangible assets increased by $292.9 million, primarily as a result
of the goodwill of $221.0 million and $94.8 million generated from the
acquisitions of Kransco and Spear, respectively, net of amortization.
The Company's capitalization is as follows:
As of Year End
----------------------------------------
(In millions) 1994 1993
- ----------------------------- ------------------- -------------------
6-7/8% Senior notes $ 99.6 7% $ 99.5 8%
6-3/4% Senior notes 100.0 7 100.0 8
Medium-Term notes 110.5 7 - -
8% Convertible subordinated
debentures - - 74.0 6
Other long-term debt
obligations 64.9 4 54.6 5
--------- -------- -------- ---------
Total long-term debt 375.0 25 328.1 27
Other long-term liabilities 82.5 5 70.8 6
Shareholders' equity 1,085.7 70 817.8 67
--------- -------- -------- ---------
$1,543.2 100% $1,216.7 100%
========= ======== ======== =========
Total long-term debt increased $46.9 million due to the issuance of
Medium-Term Notes, partially offset by voluntary conversion of the 8%
Debentures into common stock by holders of the debt. However, long-term
debt decreased as a percentage of total capitalization. Shareholders'
equity increased $267.9 million over 1993, reflecting profitable operating
results for the current year, $73.4 million related to conversions of the
8% Debentures into common shares, and $78.1 million for activity related to
employee stock compensation plans. These increases were partially offset
by treasury stock purchases of $80.9 million and dividend declarations on
common and preference stock totaling $50.3 million.
LIQUIDITY
- ---------
The primary sources of liquidity for the Company over the last three years
have been cash flows generated from operations, long-term debt issuances
and short-term seasonal borrowings. Operating activities generated cash
flows of $343.4 million during 1994, compared to $303.3 million and $131.6
million in 1993 and 1992, respectively.
Principal investing activities during 1994 included expenditures for
the Company's acquisitions of Kransco and Spear. Investing in 1994 and
1993 also included additions of tooling, property and equipment at various
manufacturing
29
and office facilities. In addition to fixed asset purchases to replenish
manufacturing and distribution facilities, investing activities during
1992 included the construction and start-up of a new manufacturing plant
in Indonesia and the $16.0 million payment of final purchase consideration
related to the Company's 1991 acquisition of Aviva Sport, Inc.
Financing activities provided intermediate- and long-term funds
through the issuance of Medium-Term Notes in 1994, the 6-3/4% Senior Notes
in 1993 and the 6-7/8% Senior Notes in 1992, which were utilized by the
Company to retire higher-cost debt and for general corporate purposes. In
1994, the Company retired Fisher-Price's 10.69% term loan. Cash outlays
for treasury stock were made over the three-year period primarily to
purchase shares for issuance under the Company's employee stock option
plans and for potential conversions of convertible securities. The Company
has consistently increased cash payments for common dividends over the
three-year period as a result of stock splits distributed to common
shareholders.
SHORT-TERM FINANCING
- --------------------
The Company's seasonal cash flow requirements for the coming year are
expected to be met by cash on hand as of December 31, 1994, cash generated
by 1995 operations, and short-term credit lines provided by domestic and
foreign banks. Under the Company's domestic credit line, unsecured
facilities provide a total of $650.0 million in seasonal financing from a
commercial bank group. The facilities provide for up to $400.0 million in
advances and backup for commercial paper issuances (a three-year facility),
and up to an additional $250.0 million (a three-year facility) for
nonrecourse purchases of certain trade accounts receivable by the bank
group. In connection with the domestic credit line, the Company is to
comply with certain financial covenants for consolidated debt-to-capital,
interest coverage and tangible net worth levels.
In addition, the Company expects to have available approximately $285
million of individual short-term international credit lines with a number
of banks, which customarily are extended as needed to meet seasonal working
capital requirements of certain foreign affiliates.
ACQUISITIONS
- ------------
On May 31, 1994, the Company acquired substantially all of the business
assets and assumed the associated debts and liabilities of Kransco, a San
Francisco-based designer, manufacturer and marketer of brand name
recreational and sporting products, including POWER WHEELS battery-powered,
ride-on vehicles; HULA HOOP and FRISBEE products marketed under the WHAM-O
trademark; STREET JAM sporting goods; and MOREY BOOGIE bodyboards. The
purchase price included net cash consideration of $254.6 million, including
costs directly related to the acquisition. In addition, the Company repaid
$20.0 million of Kransco's short-term borrowings concurrent with
consummation of the asset purchase transaction. The asset purchase
agreement also provides for future contingent consideration in the event
that net sales of the POWER WHEELS product line reaches or exceeds certain
levels in each of calendar years 1994, 1995 and 1996. The contingent
consideration payable with respect to any year shall not exceed $8.6
million. As of December 31, 1994, $8.6 million of contingent consideration
was payable, and as a result the goodwill initially recorded was increased.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of Kransco have been
included in the Company's consolidated financial statements since the date
of acquisition. The excess of the aggregate purchase price over the
estimated fair market value of the net assets acquired was approximately
$221 million, which is being amortized on a straight-line basis over 20
years.
In July 1994, the Company acquired a majority of the shares of Spear,
a company organized in the United Kingdom, that holds the rights to
SCRABBLE in markets outside of the United States and Canada, and certain
other games worldwide. Under the terms of the Company's offer,
shareholders had the option to receive the purchase consideration of 11.5
pounds sterling per issued share in either cash, interest-bearing notes or
in a combination of cash and notes. As of December 31, 1994, holders of
5.1 million shares of Spear had elected the cash option, receiving
approximately 58 million pounds sterling, and holders of 0.3 million shares
had elected to receive notes. The aggregate purchase price, including
investment advisor and other directly related expenses, denominated in
pounds sterling, was approximately $100 million. The acquisition has been
accounted for by the purchase method and, accordingly, the results of
operations of Spear have been included in the Company's consolidated
financial statements since the date of acquisition. The excess of cost
over the estimated fair market value of tangible net assets acquired was
approximately $95 million, which is being amortized on a straight-line
basis over 20 years.
On November 30, 1993, a merger was consummated between the Company and
Fisher-Price, one of the world's
30
largest manufacturers and marketers of infant and preschool toys and juvenile
products. The stock-for-stock transaction was approved by the shareholders
of both companies, after which Fisher-Price became a wholly-owned subsidiary
of the Company. The merger agreement provided for the exchange of 1.275
shares of Mattel common stock for each outstanding Fisher-Price common share,
and resulted in the issuance of 39.1 million shares, before stock splits
(61.1 million shares after stock splits), valued, on the merger's effective
date, at $1.19 billion. This transaction was accounted for as a pooling of
interests, and accordingly, financial information for periods prior to the
merger reflect retroactive restatement for the companies' combined financial
position and operating results. Prior to July 1, 1991, the business of
Fisher-Price was operated as a division of The Quaker Oats Company, and
therefore, any such financial data are excluded from the Company's combined
consolidated results presented herein.
In 1992, the Company concluded its merger with International Games,
Inc. ("IGI"), a creator, manufacturer and marketer of proprietary family
and educational card and board games, including UNO and SKIP-BO. The
merger, accounted for as a pooling of interests, was effected by exchanging
all of IGI's outstanding voting preferred and common stock for 2.0 million
shares of Mattel common stock and 0.9 million shares of Mattel 12.5%
Convertible Preference Stock, Series F, representing a combined value of
$58.5 million.
LITIGATION
- ----------
The Company is involved in various litigation and other legal matters,
including claims related to product liability and environmental cleanup,
which are being addressed or defended in the ordinary course of business.
Management believes that any liability which may potentially result upon
resolution of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
COMMITMENTS
- -----------
In the normal course of business, the Company enters into contractual
arrangements for future purchases of goods and services to ensure
availability and timely delivery, and to obtain and protect the Company's
right to create and market certain toys. Such arrangements include
commitments for future inventory purchases and royalty payments pursuant to
licensing agreements. Certain of these commitments routinely contain
provisions for guaranteed or minimum expenditures during the terms of the
contracts.
As of December 31, 1994, the Company had outstanding commitments for
1995 purchases of inventory of approximately $103 million. Licensing and
similar agreements with terms extending through the year 2002 contain
provisions for future guaranteed minimum payments aggregating approximately
$304 million.
FOREIGN CURRENCY CONTRACTS
- --------------------------
The Company enters into foreign currency forward exchange contracts and
swap agreements 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 Company's results of operations
and cash flows. As of December 31, 1994 and 1993, the Company and its
foreign affiliates had outstanding forward exchange contracts totaling
$322.7 million and $343.2 million, respectively, and swap agreements
totaling $189.9 million and $132.1 million, respectively.
Market risk exposures exist with respect to foreign currency forward
exchange contracts to the extent that currency fluctuations cannot be
predicted with certainty. The Company seeks to mitigate its exposure to
market risk through forecasting its future foreign currency positions and
hedge requirements, retaining flexibility with respect to currencies used
for international borrowing arrangements and intercompany invoicing, and
varying the degree of coverage of individual foreign currency exposures,
which may alternatively be left open, partially or fully hedged. By
policy, the Company maintains hedge coverages between minimum and maximum
percentages of its anticipated foreign currency exposures for any given
year.
In order to minimize the risk of counterparty non-performance, the
Company executes its foreign currency forward exchange contracts and swap
agreements with financial institutions believed to be credit-worthy,
generally those that provide the Company with its working capital lines of
credit. The Company does not trade in financial instruments nor does it
enter into contracts for speculative purposes.
EFFECTS OF INFLATION
- --------------------
Inflation rates in the United States and in major foreign countries in
which the Company operates have not had a significant impact on the
Company's operating results for the three years ended December 31, 1994.
The impact of inflation on the Company is minimized as a result of rapid
turnover of inventories. The U.S. Consumer Price Index increased 2.7% in
1994, 2.7% in 1993 and 2.9% in 1992.
31
CONSOLIDATED BALANCE SHEETS
---------------------------
Mattel, Inc. and Subsidiaries
December 31, December 31,
(In thousands) 1994 1993
- -----------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 239,100 $ 506,113
Marketable securities 20,581 17,468
Accounts receivable, less allowances of
$16,100 at December 31, 1994 and
$21,024 at December 31, 1993 762,024 580,313
Inventories 339,143 219,993
Prepaid expenses and other current assets 182,675 146,863
---------- ----------
Total current assets 1,543,523 1,470,750
---------- ----------
Property, Plant and Equipment
Land 22,577 15,664
Buildings 172,310 146,622
Machinery and equipment 289,796 240,449
Capitalized leases 38,468 38,209
Leasehold improvements 46,512 41,948
---------- ----------
569,663 482,892
Less: accumulated depreciation 248,666 229,130
---------- ----------
320,997 253,762
Tools, dies and molds, net 94,924 73,115
---------- ----------
Property, plant and equipment, net 415,921 326,877
---------- ----------
Other Noncurrent Assets
Intangible assets, net 432,232 139,277
Sundry assets 67,350 63,173
---------- ----------
$2,459,026 $2,000,077
========== ==========
<FN>
The accompanying notes are an integral part of these statements.
32
December 31, December 31,
(In thousands, except share data) 1994 1993
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term liabilities $ 3,095 $ 104,862
Accounts payable 295,246 175,424
Accrued liabilities 453,146 397,800
Income taxes payable 164,394 105,243
---------- ----------
Total current liabilities 915,881 783,329
---------- ----------
Long-Term Liabilities
6-7/8% Senior notes 99,604 99,470
6-3/4% Senior notes 100,000 100,000
Medium-Term notes 110,500 -
Mortgage note 45,000 45,000
8% Convertible subordinated debentures - 73,953
Other 102,351 80,516
---------- ----------
Total long-term liabilities 457,455 398,939
---------- ----------
Shareholders' Equity
Preference stock 9 9
Common stock $1.00 par value, 300.0 million
shares authorized; 223.3 million shares
issued with 220.9 million shares outstanding
for 1994 and 215.6 million shares issued with
212.3 million shares outstanding for 1993 (a) 223,264 172,470
Additional paid-in capital 234,913 226,528
Treasury stock at cost; 2.4 million shares for
1994 and 3.3 million shares for 1993 (a) (53,812) (47,350)
Retained earnings (b) 737,528 532,003
ESOP note receivable - (3,500)
Deferred compensation - (13,003)
Currency translation adjustments (b) (56,212) (49,348)
---------- ----------
Total shareholders' equity 1,085,690 817,809
---------- ----------
$2,459,026 $2,000,077
========== ==========
<FN>
Commitments and Contingencies (See accompanying notes.)
(a) Share data for 1993 have been restated for the effects of the
five-for-four stock split declared in December 1994.
(b) Since December 26, 1987 (Note 1).
33
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Mattel, Inc. and Subsidiaries
For the Year
----------------------------------
(In thousands, except per share amounts) 1994 1993 1992
- ---------------------------------------------------------------------------------
Net Sales $3,205,025 $2,704,448 $2,563,525
Cost of sales 1,603,522 1,378,181 1,324,217
---------- ---------- ----------
Gross Profit 1,601,503 1,326,267 1,239,308
Advertising and promotion expenses 516,485 426,698 403,417
Other selling and administrative expenses 536,443 473,394 471,146
Restructuring and integration charges 72,000 115,000 -
Interest expense 55,449 62,614 68,716
Other expense, net 27,494 11,915 13,084
---------- ---------- ----------
Income Before Income Taxes, Extraordinary
Item and Cumulative Effect of Changes
in Accounting Principles 393,632 236,646 282,945
Provision for income taxes 137,800 100,735 98,104
---------- ---------- ----------
Income Before Extraordinary Item and
Cumulative Effect of Changes in
Accounting Principles 255,832 135,911 184,841
Extraordinary item - loss on early
retirement of debt - (14,681) -
---------- ---------- ----------
Income Before Cumulative Effect of
Changes in Accounting Principles 255,832 121,230 184,841
Cumulative effect of changes in
accounting principles - (4,022) -
---------- ---------- ----------
Net Income 255,832 117,208 184,841
Preferred and preference stock dividend
requirements 4,689 4,894 4,978
---------- ---------- ----------
Net Income Applicable to Common Shares $ 251,143 $ 112,314 $ 179,863
========== ========== ==========
Income Per Common and Common Equivalent Share:
Primary Income Per Share
Income before extraordinary item and
cumulative effect of changes in
accounting principles $ 1.12 $ 0.62 $ 0.84
Extraordinary item - loss on early
retirement of debt - (0.07) -
Cumulative effect of changes in
accounting principles - (0.02) -
---------- ---------- ----------
Net income $ 1.12 $ 0.53 $ 0.84
========== ========== ==========
Average number of common and common
equivalent shares 223,939 213,978 216,757
========== ========== ==========
Fully Diluted Income Per Share
Income before extraordinary item and
cumulative effect of changes in
accounting principles $ 1.11 $ 0.60 $ 0.81
Extraordinary item - loss on early
retirement of debt - (0.06) -
Cumulative effect of changes in
accounting principles - (0.02) -
---------- ---------- ----------
Net income $ 1.11 $ 0.52 $ 0.81
========== ========== ==========
Average number of common and common
equivalent shares 227,006 226,062 229,072
========== ========== ==========
Dividends Declared Per Common Share $ 0.19 $ 0.15 $ 0.12
========== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
34
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Mattel, Inc. and Subsidiaries
For the Year
---------------------------------
(In thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 255,832 $117,208 $184,841
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 124,272 91,970 87,825
Provision for deferred compensation 14,918 5,957 2,692
Loss on early retirement of debt, net of tax - 14,681 -
Cumulative effect of changes in accounting
principles, net of tax - 4,022 -
Provision for lease termination, net - (41,120) -
(Increase) in marketable securities (3,113) (3,354) (5,391)
(Increase) in accounts receivable (155,265) (55,525) (95,706)
(Increase) decrease in inventories (74,148) 11,842 (24,781)
(Increase) decrease in prepaid expenses
and other current assets (38,626) 7,319 (20,460)
Increase in accounts payable, accrued
liabilities and income taxes payable 215,403 161,818 10,068
Other, net 4,166 (11,474) (7,459)
--------- -------- --------
Net cash flows from operating activities 343,439 303,344 131,629
--------- -------- --------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (75,285) (60,809) (53,611)
Purchases of other property, plant and equipment (88,097) (40,060) (46,434)
Sales of other property, plant and equipment 12,221 12,459 2,183
Investments in acquired businesses (374,965) - (17,740)
Other, net (371) (394) (841)
--------- -------- --------
Net cash flows used for investing activities (526,497) (88,804) (116,443)
--------- -------- --------
Cash Flows From Financing Activities:
Notes payable, net (5,966) (14,135) (5,367)
Issuance of 6-7/8% senior notes, net - - 99,294
Issuance of 6-3/4% senior notes - 100,000 -
Issuance of Medium-Term notes 110,500 - -
Long-term foreign borrowing (4,337) (31,262) 2,717
Redemption of Fisher-Price term loan (120,629) - -
Collection of ESOP note receivable 3,500 4,920 4,920
Payment of ESOP notes payable (3,500) (4,920) (4,920)
Redemption of senior preferred stock - - (5,500)
Tax benefit of employee stock options exercised 23,923 4,431 12,360
Exercise of stock options and warrants 39,209 8,012 12,212
Purchase of treasury stock (80,885) (52,558) (52,036)
Purchase of Fisher-Price warrants - - (8,298)
Dividends paid on common stock (43,151) (25,582) (19,083)
Dividends paid on preference stock (4,689) (4,894) (4,826)
Payment for tendered Fisher-Price warrants (4,891) - -
Other, net 4,863 (381) (2,006)
--------- -------- --------
Net cash flows (used for) from financing
activities (86,053) (16,369) 29,467
Effect of Exchange Rate Changes on Cash 2,098 (5,751) (12,987)
--------- -------- --------
(Decrease) Increase in Cash (267,013) 192,420 31,666
Cash at Beginning of Year 506,113 313,693 282,027
--------- -------- --------
Cash at End of Year $ 239,100 $506,113 $313,693
========= ======== ========
<FN>
The accompanying notes are an integral part of these statements.
35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
Mattel, Inc. and Subsidiaries
Preferred & Additional
Preference Common Paid-In Treasury
(In thousands) Stock Stock Capital Stock
- ------------------------------------------------------------------------------------------------
Balance, December 31, 1991 $ 20 $ 89,634 $304,627 $ (14,938)
Net income
Three-for-two stock split 47,971 (47,971)
Purchase of treasury stock (1,152) (12,490) (38,394)
Purchase of Fisher-Price warrants (8,298)
Restricted stock activity 3,977
Amortization of deferred compensation
Exercise of stock options and warrants 907 18,061
Issuance of treasury stock (4,990) 10,234
Dividends declared on common stock
Dividends declared on preference stock
Redemption of senior preferred stock (11) (5,489)
Utilization of net operating loss carryforwards 300
Collection of ESOP note receivable
Currency translation adjustments
--------- -------- -------- ---------
Balance, December 31, 1992 9 137,360 247,727 (43,098)
Net income
Five-for-four stock split 34,343 (34,781)
Purchase of treasury stock (52,558)
Conversion of 8% debentures (9,540) 33,876
Restricted stock activity 688 13,308
Amortization of deferred compensation
Exercise of stock options 79 6,494
Issuance of treasury stock (8,560) 14,430
Dividends declared on common stock
Dividends declared on preference stock
Cumulative effect of change in accounting
principle 53,000
Termination of pre-quasi lease commitment (41,120)
Collection of ESOP note receivable
Currency translation adjustments
--------- -------- -------- ---------
Balance, December 31, 1993 9 172,470 226,528 (47,350)
Net income
Five-for-four stock split 44,653 (44,653)
Purchase of treasury stock (80,885)
Conversion of 8% debentures 5,897 67,549
Restricted stock activity 1,915
Exercise of stock options 244 26,496
Issuance of treasury stock (38,031) 74,423
Payment for tendered Fisher-Price warrants (4,891)
Dividends declared on common stock
Dividends declared on preference stock
Collection of ESOP note receivable
Currency translation adjustments
--------- -------- -------- ---------
Balance, December 31, 1994 $ 9 $223,264 $234,913 $ (53,812)
========= ======== ======== =========
<FN>
The accompanying notes are an integral part of these statements.
ESOP Currency Total
Retained Note Deferred Translation Shareholders'
(In thousands) Earnings Receivable Compensation Adjustments Equity
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1991 $ 290,367 $(13,340) $ (4,725) $ 12,609 $ 664,254
Net income 184,841 184,841
Three-for-two stock split -
Purchase of treasury stock (52,036)
Purchase of Fisher-Price warrants (8,298)
Restricted stock activity (3,617) 360
Amortization of deferred compensation 2,692 2,692
Exercise of stock options and warrants 18,968
Issuance of treasury stock 5,244
Dividends declared on common stock (20,723) (20,723)
Dividends declared on preference stock (4,826) (4,826)
Redemption of senior preferred stock (1,059) (6,559)
Utilization of net operating loss carryforwards 300
Collection of ESOP note receivable 4,920 4,920
Currency translation adjustments (40,781) (40,781)
--------- -------- -------- -------- ----------
Balance, December 31, 1992 448,600 (8,420) (5,650) (28,172) 748,356
Net income 117,208 117,208
Five-for-four stock split (438)
Purchase of treasury stock (52,558)
Conversion of 8% debentures 24,336
Restricted stock activity (13,310) 686
Amortization of deferred compensation 5,957 5,957
Exercise of stock options 6,573
Issuance of treasury stock 5,870
Dividends declared on common stock (28,911) (28,911)
Dividends declared on preference stock (4,894) (4,894)
Cumulative effect of change in accounting
principle 53,000
Termination of pre-quasi lease commitment (41,120)
Collection of ESOP note receivable 4,920 4,920
Currency translation adjustments (21,176) (21,176)
--------- -------- -------- -------- ----------
Balance, December 31, 1993 532,003 (3,500) (13,003) (49,348) 817,809
Net income 255,832 255,832
Five-for-four stock split -
Purchase of treasury stock (80,885)
Conversion of 8% debentures 73,446
Restricted stock activity 13,003 14,918
Exercise of stock options 26,740
Issuance of treasury stock 36,392
Payment for tendered Fisher-Price warrants (4,891)
Dividends declared on common stock (45,618) (45,618)
Dividends declared on preference stock (4,689) (4,689)
Collection of ESOP note receivable 3,500 3,500
Currency translation adjustments (6,864) (6,864)
--------- -------- -------- -------- ----------
Balance, December 31, 1994 $ 737,528 $ - $ - $(56,212) $1,085,690
========= ======== ======== ======== ==========
<FN>
The accompanying notes are an integral part of these statements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Mattel, Inc. and Subsidiaries
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Mattel, Inc.
and its subsidiaries (the "Company"). All significant intercompany
accounts and transactions are eliminated, and certain amounts in the
financial statements for prior years have been reclassified to conform with
the current year presentation. Financial data for all periods presented
reflect the retroactive effects of the merger, accounted for as a pooling
of interests, with Fisher-Price, Inc. ("Fisher-Price") consummated in
November 1993.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of foreign subsidiaries are translated at end-of-
period rates of exchange. Income, expense and cash flows are translated at
weighted-average rates of exchange for the period. The resulting currency
translation adjustments are accumulated and reported as a separate
component of shareholders' equity.
Quasi-Reorganization
- --------------------
Effective December 26, 1987, the Company implemented a quasi-reorganization
and revalued its assets and liabilities to their fair values as of that
date. The $69.0 million net effect of these adjustments was credited to
additional paid-in capital. Additionally, as of December 26, 1987,
accumulated deficits of $256.0 million and cumulative currency translation
adjustments of $32.7 million were transferred to additional paid-in
capital.
Cash
- ----
Cash includes cash equivalents. Highly liquid investments with maturities
of three months or less when purchased are considered to be cash
equivalents. 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 U.S. dollar-denominated
debt securities of foreign governments held for liquidity purposes, are
stated at market value and classified as securities available-for-sale.
Unrealized gains or losses are reported as a separate component in
shareholders' equity until realized. Quoted market prices, which
approximated cost as of the balance sheet dates, are reasonable estimates
of the portfolio's fair value.
Inventories
- -----------
Inventories, net of an allowance for excess quantities and obsolescence,
are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over estimated useful lives of 15 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.
Capitalized lease assets in existence at the time of the quasi-
reorganization are recorded at their fair values determined as of December
26, 1987, less accumulated amortization computed over the remaining lease
terms. Major categories of capitalized leases are as follows (in
thousands):
As of Year End
----------------------
1994 1993
- -------------------------------- ---------- ----------
Land and buildings $37,208 $37,208
Machinery and equipment 1,260 1,001
---------- ----------
38,468 38,209
Less: accumulated amortization 18,607 16,538
---------- ----------
$19,861 $21,671
========== ==========
Intangible Assets, Net
- ----------------------
Intangible assets consist of the excess of purchase price over the fair
value of net assets acquired in purchase acquisitions, additional
performance purchase payments, and the costs of acquired patents and
trademarks. Intangible assets are amortized using the straight-line method
over periods ranging from 10 to 40 years. Accumulated amortization was
$74.0 million and $55.4 million as of December 31, 1994 and December 31,
1993, respectively.
In 1992, the amortization period for goodwill arising from certain
acquisitions was changed from 10 years to 20 years, to better reflect the
estimated periods over which related economic benefits will be realized.
Income Taxes
- ------------
Deferred income tax assets and liabilities are determined in accordance
with Statement of Financial Accounting Standards No. 109, Accounting for
--------------
Income Taxes ("SFAS No. 109"), and result from revenues and expenses being
- ------------
recognized in different time periods for financial reporting purposes than
for income tax purposes. Under SFAS No. 109, deferred income taxes arise
from temporary differences and carryforwards which are tax-effected at the
enacted tax rates and subsequently adjusted for changes in tax laws and
rates. Deferred income tax assets and liabilities are classified as
current or noncurrent based upon the financial reporting classification of
assets and liabilities to which they relate. A valuation allowance is
established if it is more likely than not that some
37
portion or all of a deferred income tax asset will not be realized. Effective
January 1, 1993, the Company adopted SFAS No. 109, the effects of which are
covered in detail in Note 2 to the consolidated financial statements.
Income and Dividends Per Common Share
- -------------------------------------
All share and per share data presented in these financial statements
reflect the retroactive effects of the Fisher-Price and IGI mergers, the
five-for-four stock splits distributed in January 1995 and 1994 and the
three-for-two stock split distributed in June 1992.
Income per common share is computed by dividing earnings available to
common shareholders by the average number of common and common equivalent
shares outstanding during each period. Primary weighted average share
computations assume the exercise of dilutive stock options and warrants,
reduced by the number of shares which could be repurchased at average
market prices with proceeds from exercise. Primary earnings represent
reported net income less preference stock dividend requirements, plus
interest savings from the assumed retirement of debt upon exercise of
dilutive warrants. On a fully diluted basis, weighted average shares are
determined assuming conversion of the 8% Debentures and Series F preference
shares, and exercise of all dilutive stock options and warrants, net of
assumed treasury share purchases at the higher of end-of-period or average
market prices. Fully diluted earnings represent reported net income less
required Employee Stock Ownership Plan ("ESOP") dividends or contributions
upon conversion of the preference shares and adjusted for the effects, net
of tax, resulting from the assumed conversions of convertible securities
and the exercise of dilutive warrants.
Foreign Currency Contracts
- --------------------------
The Company enters into foreign currency forward exchange contracts and
swap agreements as hedges to limit the effect of exchange rate fluctuations
on the Company's results of operations and cash flows. Gains and losses
related to hedged transactions are deferred and are recognized in results
of operations as part of the underlying transaction while those related to
unhedged transactions are included in the income statement currently.
NOTE 2 - INCOME TAXES
- ---------------------
Consolidated pretax income before extraordinary item and cumulative effect
of changes in accounting principles consists of the following (in
thousands):
For the Year
----------------------------------
1994 1993 1992
- ---------------------------------- ---------- ---------- ----------
U.S. operations $268,817 $127,937 $179,250
Foreign operations 124,815 108,709 103,695
---------- ---------- ----------
$393,632 $236,646 $282,945
========== ========== ==========
The provision for current and deferred income tax expense consists of
the following (in thousands):
For the Year
----------------------------------
1994 1993 1992
- ---------------------------------- ---------- ---------- ----------
Current
Federal $ 76,100 $ 64,358 $ 41,648
State 12,100 11,758 13,300
Foreign 48,200 47,884 47,500
--------- --------- ---------
136,400 124,000 102,448
--------- --------- ---------
Deferred
Federal 1,500 (21,841) (3,000)
State 2,250 (3,629) (844)
Foreign (2,350) (6,640) (500)
--------- --------- ---------
1,400 (32,110) (4,344)
--------- --------- ---------
Provision excluding extraordinary
item 137,800 91,890 98,104
Benefit allocated to extraordinary
item - 8,845 -
--------- --------- ---------
Total provision for income taxes $137,800 $100,735 $ 98,104
========= ========= =========
Deferred income taxes are provided principally for certain reserves,
depreciation, employee compensation-related expenses and certain other
expenses that are recognized in different years for financial statement and
income tax purposes. The Company's deferred income tax assets
(liabilities) were comprised of the following (in thousands):
December 31, January 1,
1994 1994
- ------------------------------------------ ------------ ----------
Deferred compensation $ 11,588 $ 17,035
Sales allowances and inventory reserves 55,826 41,225
Operating loss and tax credit carryovers 26,448 68,774
Excess of tax basis over book basis 9,483 6,261
Postretirement benefits 12,554 12,210
Restructuring and integration charges 36,085 21,667
Loss on debt retirement - 8,845
Other 29,668 22,271
------------ ----------
Gross deferred income tax assets 181,652 198,288
------------ ----------
Excess of book basis over tax basis (14,230) (8,986)
Depreciation (816) (2,753)
Retirement benefits (7,298) (4,781)
Other (11,001) (15,005)
------------ ----------
Gross deferred income tax liabilities (33,345) (31,525)
Deferred income tax asset valuation
allowances (33,044) (52,405)
------------ ----------
Net deferred income tax assets $ 115,263 $ 114,358
============ ==========
38
Differences between the provision for income tax expense at the United
States federal statutory income tax rate and the provision in the
consolidated statements of income were as follows (in thousands):
For the Year
----------------------------------
1994 1993 1992
- --------------------------------------- ---------- ---------- ----------
Provision at federal statutory rates $ 137,771 $ 82,812 $ 96,179
Increase (decrease) resulting from:
Losses without income tax benefit 1,160 2,436 9,068
Foreign earnings taxed at different
rates, including withholding taxes (12,029) (1,827) (14,815)
Tax benefit of future deductions - (994) 3,600
State and local taxes, net of
federal benefit 9,327 5,417 8,259
Dividends paid to ESOP (1,600) (1,500) (1,600)
Nondeductible restructuring costs - 13,599 -
Other 3,171 792 (2,587)
---------- ---------- ----------
Total provision $ 137,800 $100,735 $ 98,104
========== ========== ==========
Appropriate U.S. 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 which the Company intends to permanently invest and
upon which no deferred U.S. income taxes have been provided is $301.8
million at December 31, 1994. The additional U.S. income tax on the
unremitted foreign earnings, if repatriated, would be offset in whole or in
part by foreign tax credits. Foreign withholding taxes of $14.3 million
would be due upon remittance of these earnings.
Certain foreign subsidiaries have net operating loss carryforwards
totaling $61.2 million ($2.0 million with no expiration date; $59.2 million
expiring 1995 to 1999).
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 1994, 1993 and 1992,
nonqualified stock options exercised resulted in credits to additional
paid-in capital totaling $23.9 million, $4.4 million and $12.4 million,
respectively.
The Internal Revenue Service has completed its examination of the
Company's federal income tax returns through January 28, 1984.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, which replaced
---------------------------
Statement No. 96. Upon adoption, a net deferred income tax asset of $69.0
million was recorded, of which $16.0 million related to postquasi-
reorganization net operating losses carried forward, and $53.0 million
related principally to future tax deductions, and foreign tax credit and
alternative minimum tax credit carryovers resulting from activities prior
to the 1987 quasi-reorganization. The benefit of $16.0 million (or $0.07
per fully diluted share in the 1993 first quarter) was recognized in after-
tax earnings as the cumulative effect of a change in accounting principle;
the remaining $53.0 million was credited to additional paid-in capital in
accordance with the required accounting treatment for transactions
resulting from activities prior to the 1987 quasi-reorganization.
NOTE 3 - EMPLOYEE BENEFITS
- --------------------------
The Company and certain of its subsidiaries have various pension and
retirement plans covering substantially all employees of these companies.
Pension expense for the Company's plans totaled $14.6 million, $10.0
million and $9.5 million in 1994, 1993 and 1992, respectively. Prior to
the November 1993 merger, Fisher-Price maintained a number of benefit plans
and compensation arrangements. In general, these programs shall continue
to be administered by Fisher-Price without material change or modification
for periods up to five years following the merger, depending upon the
program.
Pension Plans
- -------------
The Company provides defined benefit pension plans covering certain of its
domestic and foreign employees. Plan benefits are based upon covered
employees' length of service and earnings. Pension costs are actuarially
determined and plans are generally funded to meet benefit obligations
existing as of the end of each year. Contributions are based upon amounts
required to be funded under applicable governmental regulations, but will
not exceed the maximum amount deductible for income tax purposes. Assets
of these plans are invested in equity securities, as well as corporate,
government and other fixed-income investments.
The Mattel, Inc. Pension Plan is a noncontributory defined benefit
plan for certain domestic hourly employees who are covered by collective
bargaining agreements. Accumulated and vested benefit obligations, pension
cost and other expenses related to this plan were not significant in 1994,
1993 or 1992.
Activity related to pension plans of foreign affiliates of the Company
was not significant during any year.
The Fisher-Price, Inc. Pension Plan, a defined benefit plan covering
most of the domestic employees of Fisher-Price, contains certain change-of-
control provisions which were triggered as a result of the November 1993
merger. For a five-year period, or until the assets of the plan are less
than its liabilities, if earlier, the rate at which benefits accrue on
behalf of participants may not be decreased, and in the event of the plan's
termination or consolidation with another plan, assets in excess of
liabilities must be used to increase participants' benefits. In addition,
for a two-year period following the merger, participants whose employment
with the Company is terminated under certain conditions may be entitled to
immediate vesting and increased annual benefits under the plan. The
components of net pension cost for this plan, based upon an October
valuation date for the years ended December 31, 1994 and 1993 and January
3, 1993, are detailed below (in thousands):
For the Period
----------------------------------
1994 1993 1992
- --------------------------------- ---------- ---------- ----------
Service cost $ 3,562 $ 2,928 $ 2,450
Interest cost 7,646 6,801 6,214
Actual loss (gain) on plan assets 1,038 (9,267) (8,831)
Net amortization and deferral (14,221) (2,261) (1,919)
---------- ---------- ----------
Net pension income $ (1,975) $(1,799) $(2,086)
========== ========== ==========
39
Reconciliation of the funded status of Fisher-Price's domestic pension
plan to the related prepaid asset included in the consolidated balance
sheets are as follows (in thousands):
As of Year End
----------------------
1994 1993
- --------------------------------------- ---------- ---------
Vested benefits $ 85,510 $101,596
Nonvested benefits 3,643 3,979
---------- ---------
Accumulated benefit obligation 89,153 105,575
Effect of projected future salary
increases 3,923 5,319
---------- ---------
Projected benefit obligation 93,076 110,894
Plan assets at fair value 117,866 122,237
--------- ---------
Plan assets in excess of projected
benefit obligation 24,790 11,343
Unrecognized net (gain) loss (1,424) 12,308
Unrecognized prior service cost 2,886 3,194
Unrecognized net asset at transition (11,561) (14,130)
--------- ---------
Prepaid pension asset $ 14,691 $ 12,715
========== ==========
For the Period
----------------------
1994 1993 1992
- --------------------------------------- ------ ------ ------
Assumptions:
Weighted average discount rate 8.5% 7.0% 8.0%
Rate of future compensation increases 4.0% 4.0% 5.0%
Long-term rate of return on plan
assets 10.0% 10.0% 9.0%
- ----------------------------------------------------------------
Other Retirement Plans
- ----------------------
Domestic employees not covered by collective bargaining agreements are
eligible to participate in the Company's 401(k) savings plans. Under these
defined contribution plans, the Company makes contributions to a trust
based upon the employee's age, as well as matches percentages of certain
amounts of voluntary employee contributions. Mattel's Personal Investment
Plan covers employees of Mattel, Inc. The Fisher-Price, Inc. Matching
Savings Plan, which covers employees of Fisher-Price, will be separately
maintained for at least two years following the November 1993 merger. On
June 30, 1994, the Fisher-Price Profit Sharing and Retirement Savings Plan
was merged and all its assets were transferred into the Fisher-Price, Inc.
Matching Savings Plan.
The Company maintains unfunded supplemental retirement plans which are
unqualified defined benefit plans covering certain key executives of
Mattel, Inc. In addition, compensation deferral and excess benefit plans
exist for certain officers and key employees of both Mattel, Inc. and
Fisher-Price. For 1994, 1993 and 1992, the accumulated and vested benefit
obligations and related expense of these plans were not significant.
Employee Stock Ownership Plan
- -----------------------------
In January 1987, an employee stock ownership plan was established for
employees of IGI. The ESOP is a defined contribution plan satisfying the
requirements of the Employee Retirement Income Security Act of 1974. A
combination of dividends and cash contributions were paid by the Company in
amounts sufficient for the plan to meet its debt service obligations.
Payments to the ESOP for the years ended December 31, 1994 and December 31,
1993 were as follows (in thousands):
For the Year
------------------------
1994 1993
---------- ----------
Dividends on stock held by ESOP $3,485 $4,900
Company contribution to ESOP 15 20
---------- ----------
3,500 4,920
Interest on ESOP indebtedness 48 189
---------- ----------
Total payments to ESOP $3,548 $5,109
========== ==========
In connection with the February 1992 merger, IGI convertible preferred
stock held by the ESOP was exchanged for 44,653 shares of the Company's
common stock and 864,293 shares of the Company's 12.5% Convertible
Preference Stock, Series F. The ESOP debt was repaid in August 1994. Per
the terms of the plan, the Company must terminate the ESOP no later than
December 31, 2000.
Postretirement Benefits
- -----------------------
The Company maintains a postretirement benefit plan for domestic employees
of Mattel, Inc. The plan provides for health care to retirees meeting
certain age and years of service requirements, and consists primarily of
medical and prescription benefits, Medicare Part B reimbursement and life
insurance. The plan calls for the payment of premiums by the participants,
which amounts are intended to fund the costs of the plan. The Company
reimburses 100% of Medicare Part B premiums for salaried employees who
retired on or before July 1, 1993, and for union employees who retired on
or before March 7, 1988. Employees retiring subsequent to those dates are
not eligible for reimbursement. Life insurance coverage is provided for
union hourly employees retiring with a pension.
In the first quarter of 1993, the Company adopted Statement of
Financial Accounting Standards No. 106, Employers' Accounting for
-------------------------
Postretirement Benefits Other Than Pensions ("SFAS No. 106"), with
- -------------------------------------------
immediate recognition of an actuarially-determined accumulated
postretirement benefit obligation of $2.3 million for the Mattel, Inc.
plan. The related charge of $1.4 million, after deferred income tax
benefits of $0.9 million, was recognized in earnings as the cumulative
effect of a change in accounting principle. The ongoing costs and
obligations associated with the Mattel, Inc. plan are not significant to
the Company's financial position and results of operations.
Fisher-Price has a postretirement health insurance plan covering
substantially all domestic employees hired prior to January 1, 1993.
Existing retirees, employees who elected to retire before January 1, 1994
and employees whose age-plus-service was equal to 70 years by December 31,
1993 may continue to participate, for their lifetime, in the Fisher-Price
group health insurance plan at the same contribution rate as active
employees. All other active employees who do not satisfy the criteria
outlined above participate in a retiree medical account balance plan. An
account was established, as of January 1, 1993, for each eligible employee,
with a balance equal to $865 for each year of service, including past
service,
40
up to a maximum of 25 years. The account balance will become
available upon a participant's retirement at age 55 or anytime thereafter
with five years of service, and may be used to purchase benefits through
the Fisher-Price health care insurance plan or through an outside insurance
provider, and to pay for health care expenses not reimbursed by insurance
or Medicare. If an employee terminates employment prior to satisfying the
retirement criteria, the account balance is forfeited and no benefits are
paid.
Details of the plan's expense recognized in the consolidated financial
statements as of December 31, 1994 and 1993 are as follows (in thousands):
For the Year
----------------------
1994 1993
- -------------------------------------- ---------- ----------
Service cost $ 511 $ 475
Interest cost 1,826 1,999
Recognition of transition obligation - 29,357
---------- ----------
Net postretirement benefit cost $2,337 $31,831
========== ==========
The funded status of the plan and the amounts included in the
Company's consolidated balance sheets are as follows (in thousands):
As of Year End
----------------------
1994 1993
- ---------------------------------------- ---------- ----------
Current retirees $19,011 $19,367
Fully eligible active employees 5,078 4,359
Other active employees 6,659 5,631
---------- ----------
Accumulated postretirement benefit
obligation 30,748 29,357
Unrecognized net loss (21) -
---------- ----------
Accrued postretirement benefit liability $30,727 $29,357
========== ==========
The discount rates used in determining the accumulated postretirement
benefit obligation were 8.5% and 7.0% for 1994 and 1993, respectively. For
participants below 65 years of age, the health care cost trend rate for
expected claim costs was assumed to be 8.0% in 1994, declining to 6.75% by
1997 and remaining constant thereafter. For participants 65 years of age
or older, the health care cost trend rate for expected claim costs was
assumed to be 7.0% in 1994, declining to 6.75% by 1996 and remaining
constant thereafter. A one percentage point increase in the assumed health
care cost trend rate for each future year would have increased the
aggregate of service and interest cost for 1994 by approximately $0.3
million and increased the accumulated postretirement benefit obligation as
of December 31, 1994 by approximately $3 million.
In January 1993, Fisher-Price adopted the provisions of SFAS No. 106
by electing to amortize its unrecognized transition obligation over 20
years. Upon consummation of the November 1993 merger, Fisher-Price's
accounting methodology was conformed to that of the Company, and
accordingly, a related $18.6 million charge, net of deferred income tax
benefits of $10.7 million, was recognized in earnings as the cumulative
effect of a change in accounting principle retroactively as of the 1993
first quarter.
Incentive Awards
- ----------------
The Company's Long-Term Incentive Plan is a variable compensation plan
available to certain key executives of Mattel, Inc. Awards are paid
annually based upon the performance of the Company over a three-year
period. Pursuant to the Company's 1990 stock option plan, stock
appreciation rights ("SAR") had been awarded in 1991 to certain key
executives of Mattel, Inc. In February 1994, the value of SARs was capped,
and they were canceled in exchange for awards consisting of nonqualified
stock options and cash, which amount is payable in two equal installments
on March 15, 1995 and 1996, contingent upon the executive's continued
employment by the Company. At December 31, 1994 and 1993, $26.0 million
and $13.6 million, respectively, were accrued for awards under these plans.
The Company also has discretionary annual incentive compensation plans
for officers and key employees of both Mattel, Inc. and Fisher-Price, Inc.
based on the Company's performance and subject to certain approvals of the
Compensation/Options Committee of the Board of Directors. At December 31,
1994 and 1993, $30.4 million and $22.4 million, respectively, were accrued
for awards under these plans.
NOTE 4 - SEASONAL FINANCING AND LONG-TERM DEBT
- ----------------------------------------------
Seasonal Financing
- ------------------
The Company maintains and periodically amends or replaces a revolving
credit agreement with a commercial bank group which is utilized to finance
the working capital requirements of its domestic and certain international
operations. The agreement in effect during 1994, which was recently
amended (see below), was renegotiated in the first quarter of 1994 to
increase the total facility to $500.0 million from $350.0 million. Within
the facility, up to $250.0 million was a standard revolving credit line
available for advances and backup for commercial paper issuances ($125.0
million of which was a 364-day facility and the other $125.0 million was a
three-year facility). Interest was charged at various rates selected by
the Company not greater than the base rate charged by the agent bank, plus
a commitment fee of up to .1375% of the unused line available for advances.
The remaining $250.0 million (a three-year facility) was available for
nonrecourse purchases of certain trade accounts receivable of the Company
by the commercial bank group providing the credit line. During 1994,
proceeds of $174.0 million were received by the Company as a result of
accounts receivable purchases by the bank group. The agreement required
the Company to comply with certain consolidated financial covenants for
debt-to-capital, interest coverage and tangible net worth levels.
To meet seasonal borrowing requirements of international operations in
addition to amounts funded by proceeds of its revolving credit agreement,
the Company negotiates individual financing arrangements, generally with
the same groups of banks that provided credit in the prior year.
International credit lines total approximately $285 million, a
41
portion of which is used to support letters of credit. The Company
expects to extend these credit lines throughout 1995 and believes
available amounts will be adequate to meet its seasonal financing
requirements.
During 1993, Fisher-Price had available domestic and international
seasonal credit lines totaling $175.0 million and $90.0 million,
respectively. Upon consummation of the merger, the domestic credit line
was repaid and terminated. During 1994, Fisher-Price's international
credit lines were terminated and its international operations were financed
by the Company's existing credit facilities.
Interest rates charged on the Company'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 the Company's domestic and international credit
lines is summarized as follows (in thousands):
For the Year
----------------------------
1994 1993 1992
- ----------------------------------- -------- -------- --------
Balance at end of year
Domestic $ - $ - $ -
International - - 13,400
Maximum amount outstanding
Domestic 613,000 167,000 258,800
International 74,000 76,100 264,700
Average borrowing
Domestic 271,000 45,100 114,300
International 36,000 55,100 156,300
Weighted average interest rate on
average borrowing
Domestic (computed daily) 5.0% 3.5% 4.4%
International (computed monthly) 11.5% 8.5% 11.2%
- ---------------------------------------------------------------------
Effective in March 1995, the Company amended its revolving credit
agreement. The new agreement consists of unsecured facilities providing a
total of $650.0 million in seasonal financing from substantially the same
group of commercial banks. The facilities provide for up to $400.0 million
in advances and backup for commercial paper issuances (a three-year
facility), and up to an additional $250.0 million (a three-year facility)
for nonrecourse purchases of certain trade accounts receivable by the bank
group. In connection with the agreement, the Company is to comply with
certain consolidated financial covenants for debt-to-capital, interest
coverage and tangible net worth levels.
6-7/8% Senior Notes
- -------------------
In August 1992, the Company issued $100.0 million aggregate principal
amount of 6-7/8% Senior Notes maturing August 1, 1997. Interest is payable
semiannually on the first day of February and August. The 6-7/8% Senior
Notes may not be redeemed prior to maturity. Net proceeds from this
issuance were used to reduce outstanding borrowings under the Company's
domestic revolving credit line. At December 31, 1994 and 1993, the bid
prices for the 6-7/8% Senior Notes, as provided by one of the underwriters,
were $965.10 and $1,041.80, respectively, based on a par value of
$1,000.00.
6-3/4% Senior Notes
- -------------------
In May 1993, the Company issued $100.0 million aggregate principal amount
of 6-3/4% Senior Notes maturing May 15, 2000. Interest is payable
semiannually on the fifteenth day of each May and November. The 6-3/4%
Senior Notes may not be redeemed prior to maturity. Net proceeds from this
issuance were used in place of short-term borrowing for working capital
purposes. At December 31, 1994 and 1993, the bid prices for the 6-3/4%
Senior Notes, as provided by one of the underwriters, were $924.39 and
$1,025.32, respectively, based on a par value of $1,000.00.
Medium-Term Notes ("MT Notes")
- ------------------------------
During the 1994 third quarter, the Company commenced a program for the
issuance of up to $250.0 million in aggregate principal amount of Series A
Medium-Term Notes. The MT Notes are issuable in one or more series and can
be denominated in U.S. dollars or other specified currencies. The MT Notes
bear interest at either fixed or variable rates, as determined at the time
of issuance, and have maturity dates of greater than nine months.
During the 1994 fourth quarter, the Company issued an aggregate of
$80.5 million principal amount of MT Notes maturing on various dates from
October 1999 to December 2004. Interest is payable semiannually at fixed
rates ranging from 8.00% to 8.55% per annum on the fifteenth day of May and
November, beginning on November 15, 1994. The proceeds of these issuances
were used for general corporate purposes. At December 31, 1994, the bid
prices for fixed rate MT Notes ranged from $983.12 to $997.33, based on a
par value of $1,000.00.
The Company also issued an aggregate of $30.0 million principal amount
of MT Notes, maturing in January 1996, bearing interest at three-month
LIBOR plus .125%, initially set at 6.5% per annum. Interest is payable
quarterly on the twenty-ninth day of March, June, September and December,
beginning on March 29, 1995. The proceeds from this issuance were also
used for general corporate purposes. The principal amount of the MT Notes
approximates fair value since the interest rate on this obligation is reset
quarterly.
Mortgage Note
- -------------
In 1990, the Company borrowed $45.0 million under a mortgage agreement
secured by its headquarters office facility in El Segundo, California. The
agreement requires monthly interest-only payments for the first 60 months
of its term and monthly principal and interest payments of approximately
$0.4 million thereafter, until its December 2005 maturity date. Interest
is payable at 10.15% for the term of the agreement. The fair value of the
mortgage note, estimated by discounting future cash flows at the interest
rates currently available for debt with the same credit rating, similar
terms and maturity date, was approximately $48 million and $53 million at
December 31, 1994 and 1993, respectively.
42
Fisher-Price Term Loan
- ----------------------
The current portion of long-term liabilities as of December 31, 1993
included $100.0 million of term indebtedness to insurance companies.
Following the merger, the Company reached an agreement with the lenders
permitting prepayment of this obligation. The prepayment premium and
write-off of unamortized issuance costs resulted in an extraordinary charge
against earnings in the 1993 fourth quarter, net of an $8.8 million income
tax benefit, of $14.7 million, or $0.06 per fully diluted share.
8% Convertible Subordinated Debentures ("8% Debentures")
- --------------------------------------------------------
During the 1994 first quarter, the Company issued its Notice of Redemption
to holders of the 8% Debentures. In lieu of redemption at a price of
104.571%, holders could elect to convert the 8% Debentures into the
Company's common stock at a conversion price of $12.83 per share. During
the 1994 first quarter, holders tendered the remaining $75.7 million of the
8% Debentures for conversion into 7.4 million common shares. Holders had
previously tendered $24.3 million par value of the 8% Debentures for
conversion into 2.4 million common shares during the 1993 fourth quarter.
Scheduled Maturities
- --------------------
The aggregate amounts of long-term debt and capitalized lease obligations
maturing in the next five years are as follows (in thousands):
Medium Capitalized
Senior Term Mortgage Lease
Year Debt Notes Note Obligations Other Total
- ------ --------- ---------- -------- ----------- --------- ---------
1995 $ - $ - $ - $100 $4,000 $ 4,100
1996 - 30,000 400 100 3,000 33,500
1997 100,000 - 500 100 1,000 101,600
1998 - - 500 100 300 900
1999 - 30,000 600 100 300 31,000
- --------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY
- -----------------------------
Preference Share Purchase Rights
- --------------------------------
In 1992, the Board of Directors approved an extension of the Company's
Preference Share Purchase Rights plan. The rights may be exercised by
their holders to purchase shares of the Company's Series E Junior
Participating Preference Stock upon the occurrence of certain events,
including the acquisition, or announcement of intended acquisition, of 20
percent or more of Mattel's common stock by a person or group of affiliated
or associated persons. The rights are subject to adjustment in the event
of stock dividends, stock splits or other changes in the Company's common
stock, and will expire on February 17, 2002, unless the plan is further
extended or the rights are earlier redeemed or exchanged by the Company.
Preferred and Preference Stock
- ------------------------------
The Company is authorized to issue 3.0 million shares of $1.00 par value
preferred stock and 20.0 million shares of $0.01 par value preference
stock. No preferred shares are outstanding and the Company has no current
plan to issue any such shares.
In February 1992, 1.5 million shares of $0.01 par value preference
shares were designated as Series E Junior Participating Preference Stock in
connection with a distribution of Preference Share Purchase Rights to the
Company's common shareholders. Series E shares are issuable only when
rights become exercisable under the Preference Share Purchase Rights plan
(see above).
In connection with the IGI merger in February 1992, 864.3 thousand
shares of $0.01 par value preference stock were designated as 12.5%
Convertible Preference Stock, Series F, and issued to the IGI ESOP.
Dividends are payable at the option of the Company and are cumulative.
Additionally, when cash dividends are declared on the Company's common
stock, Series F preference shares are entitled to participate in such
distribution as if converted into common stock at that time.
Each Series F share is convertible, at the option of the ESOP's
trustee, into .854145 shares of Mattel common stock. The aggregate
liquidation preference of the Series F shares as of December 31, 1994 was
$33.8 million or $39.056 per share. The ESOP note receivable, which was
secured by the Series F Preference Stock, was repaid in August 1994.
Common Stock
- ------------
Concurrently with their approval of the Fisher-Price merger in 1993,
shareholders of the Company voted to amend the Mattel, Inc. certificate of
incorporation to increase the number of common shares authorized from 150.0
million to 300.0 million shares.
Stock Options
- -------------
Under the Company's stock option plans, officers and other key employees
may be granted nonqualified stock options, restricted stock awards and
stock appreciation rights. Generally, options are exercisable contingent
upon the grantees' continued employment with the Company, and in
installments when permitted by the Board of Directors or its
Compensation/Options Committee. As of December 31, 1994 and 1993, a total
of 10.6 million shares and 15.5 million shares, respectively, of Mattel
common stock were reserved for issuance under these plans.
Nonqualified stock options are granted at not less than 100 percent of
the fair market value of the Company's common stock on the date of award,
and generally expire within ten years from date of grant. Restricted stock
awards issued are subject to various restrictions. During the time period
from the award date until the restrictions lapse, shares cannot be sold,
assigned, pledged or otherwise encumbered by the recipients. As of
December 31, 1994, restricted stock awards granted to Mattel executives
totaled 742.2 thousand shares. The market value of these shares as of
December 31, 1994 was charged to income as part of the 1994 restructuring.
Any subsequent increases or decreases in market value through January 1,
1997, the end of the restriction period, will be reflected in the results
of operations currently.
43
The following is a summary of stock option information for the
Company's plans during the year (options in thousands):
Options Outstanding
-------------------------------
Nonqualified Plans Number (a) Price (a)
- --------------------------------- ------------ ----------------
Outstanding at December 31, 1992 8,464 $ 2.22 to $15.68
Granted 6,042 9.76 to 19.12
Exercised (1,329) 2.22 to 15.68
Canceled (685) 2.90 to 15.68
------------
Outstanding at December 31, 1993 12,492 2.22 to 19.12
Granted 3,043 18.20 to 22.30
Exercised (4,901) 2.22 to 15.68
Canceled (116) 3.03 to 17.52
------------
Outstanding at December 31, 1994 10,518 $ 2.30 to $22.30
============
Options exercisable at:
December 31, 1993 (b) 5,273
December 31, 1994 (c) 2,560
- -----------------------------------------------
<FN>
(a) Number of options and prices reflect the retroactive effect
of the November 1993 Fisher-Price merger and the five-for-
four stock splits distributed in January 1995 and 1994.
(b) Average exercise price - $11.23 per share. Expiration dates
vary from July 12, 1994 to December 15, 2003.
(c) Average exercise price - $14.86 per share. Expiration dates
vary from November 11, 1995 to August 25, 2004.
The Company's 1990 stock option plan provides that up to 1% of
Mattel's outstanding common stock as determined on December 31 of the
preceding year will be available for awards during each calendar year in
which the plan is in effect. In connection with the Fisher-Price merger,
shareholders approved the Board of Directors' recommendation of an increase
of 4.7 million shares above the standard 1% limitation as set forth in the
plan. The purpose of such increase was to accommodate the post-merger
grant of awards to employees of Mattel and Fisher-Price as motivation for
the successful integration and future operation of the combined business.
The Fisher-Price Long-Term Incentive Plan of 1991 provided benefits
for eligible participants in the form of stock options, stock appreciation
rights, restricted stock, performance units and other awards as determined
by the plan's administrative committee. Effective with the merger, all
stock-based awards and benefits previously granted and outstanding under
the plan became fully vested and, if not previously exercised, converted
into rights to receive equivalent shares, as adjusted for the 1.275 (pre-
split basis) merger exchange ratio, of Mattel common stock. Accordingly,
300.5 thousand Fisher-Price restricted stock awards outstanding became
fully vested; the remaining unamortized deferred compensation of $3.0
million was recognized in the fourth quarter of 1993.
Fisher-Price Stock Subscription Warrants
- ----------------------------------------
In connection with their Term Loan, Fisher-Price had issued to the lenders
detachable warrants allowing them to purchase shares of Fisher-Price stock,
subject to certain antidilution requirements. In November 1992, Fisher-
Price repurchased from the holders warrants representing rights to 1.5
million common shares. As of the effective date of the merger, the Company
agreed to assume Fisher-Price's obligations pursuant to the provisions of
the warrants.
Change-of-control provisions of the warrants allowed the holders a
six-month period from the merger date to elect to receive, in lieu of
exercises for common shares, an amount in cash equal to the product
obtained by multiplying the number of shares of common stock purchasable
upon exercise by the highest closing market price of such shares, as
reported on the NYSE Composite Tape during the period from August 19, 1993
through November 30, 1993, less the warrant exercise price. During June
1994, holders of 360.8 thousand warrants elected the cash option and
received $4.9 million.
The exercise of all outstanding warrants by the holders would result
in delivery of approximately 1.0 million shares of the Company's common
stock at an exercise price of $5.96462 per share.
Conversion of 8% Debentures
- ---------------------------
During the 1994 first quarter, holders tendered $75.7 million of the 8%
Debentures for conversion into 7.4 million common shares in response to the
Company's Notice of Redemption. Holders had previously tendered $24.3
million par value of the 8% Debentures for conversion into 2.4 million
common shares during the 1993 fourth quarter.
Common Stock Repurchase Plan
- ----------------------------
In May 1990, the Board of Directors authorized a stock repurchase plan
which initially provided for annual repurchases on the open market of up to
one percent of the Company's common stock to fund the stock option plans.
In May 1993, the Board expanded the repurchase program to permit the
repurchase of up to 15.6 million shares over the next four years. During
1994 and 1993, the Company purchased 3.7 million and 3.3 million shares,
respectively. Shares repurchased, less 4.6 million shares reissued in 1994
and 3.5 million shares reissued in 1993, are included in treasury stock.
Dividends and Capital Transactions
- ----------------------------------
On December 19, 1994, the Board of Directors declared a five-for-four stock
split on the Company's common stock, distributable on January 20, 1995 to
shareholders of record as of January 6, 1995. Accordingly, $44.7 million
was transferred from additional paid-in capital to common stock,
representing the par value of additional shares issued. Similar transfers
were made between paid-in capital and common stock in the amounts of $34.3
million and $48.0 million to reflect the respective declarations of a five-
for-four stock split in November 1993 and a three-for-two stock split in
May 1992.
A regular quarterly cash dividend has been declared by the Board of
Directors on the Company's common stock since the second quarter of 1990.
44
NOTE 6 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Leases
- ------
The Company 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, 1994 (in thousands):
Capitalized Operating
Leases Leases
- -------------------------- ----------- ---------
1995 $ 400 $ 31,600
1996 400 26,000
1997 400 16,200
1998 400 14,300
1999 400 13,100
Thereafter 11,000 13,200
----------- ---------
13,000 (a) 114,400
Less: sublease commitments - 200
----------- ---------
$13,000 $114,200
=========== =========
<FN>
(a) Includes $10.3 million of imputed interest.
Rental expense under operating leases amounted to $33.7 million, $33.8
million and $32.1 million for 1994, 1993 and 1992, respectively, net of
sublease income of $0.7 million, $0.4 million and $2.8 million.
In connection with the discontinuance of certain operations in 1984,
the Company remained obligated for a facility lease through 1998. The
Company determined in April 1993 that it would not, upon the expiration of
the sublease agreements, utilize such facility and made a lease termination
payment to discharge its remaining obligations to the lessor. A net charge
in the amount of $41.1 million, after related tax effects of $26.9 million,
for the cost of the lease termination was charged to additional paid-in
capital, consistent with the treatment accorded transactions which preceded
the Company's 1987 quasi-reorganization.
Commitments
- -----------
In the normal course of business, the Company enters into contractual
arrangements for future purchases of goods and services to ensure
availability and timely delivery and to obtain and protect the Company's
right to create and market certain toys. Such arrangements include
commitments for future inventory purchases and royalty payments pursuant to
licensing agreements. Certain of these commitments routinely contain
provisions for guaranteed or minimum expenditures during the terms of the
contracts.
The Company has no significant exposure to credit risk in the event of
nonperformance by any counterparty or group of counterparties to its
outstanding commitments and foreign currency contracts. Market risk
exposures exist with respect to foreign currency forward exchange contracts
to the extent that currency fluctuations cannot be predicted with
certainty. The Company seeks to mitigate its exposure to market risk
through forecasting its future foreign currency positions and hedge
requirements, retaining flexibility with respect to currencies used for
international borrowing arrangements and intercompany invoicing, and
varying the degree of coverage of individual foreign currency exposures,
which may alternatively be left open, partially or fully hedged. By
policy, the Company maintains hedge coverages between minimum and maximum
percentages of its anticipated foreign currency exposures for any given
year.
Current and future commitments for guaranteed payments reflect the
Company's focus on expanding its product lines through alliances with
businesses in other industries, such as sporting goods and television and
motion picture entertainment companies. The single largest commitment
involves the Company's 1991 agreements with The Walt Disney Company. An
extended licensing agreement permits the Company to use the Disney name and
characters on preschool and infant products through 2001 and provides for
the addition of certain other Disney characters and product lines to those
previously licensed to the Company. In addition, a related ten-year
agreement involves the Company's participation in attractions and toy
stores at three Disney theme parks and the development of theme park toys.
As of December 31, 1994, the Company had outstanding commitments for
1995 purchases of inventory of approximately $103 million. As of December
31, 1993, the Company had commitments for 1994 purchases of inventory of
approximately $56 million.
Licensing and related agreements provide for terms extending from 1995
through 2002 and contain provisions for future minimum payments as shown in
the following table (in thousands):
Minimum
Payments
- ----------------------------------- ---------
1995 $ 52,000
1996 44,000
1997 43,000
1998 42,000
1999 43,000
Thereafter 80,000
---------
$304,000
=========
Royalty expense for the years ended December 31, 1994, 1993 and 1992
was $83.9 million, $69.2 million and $50.2 million, respectively.
Foreign Currency Contracts
- --------------------------
The Company enters into foreign currency forward exchange contracts and
swap agreements 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 Company's results of operations
and cash flows. These contracts generally have maturity dates ranging from
one to fifteen months. Gains or losses related to hedged transactions are
deferred and are recognized in results of operations as a part of the
underlying transaction. Had the Company not entered into hedges covering a
percentage of its foreign currency positions, the unfavorable effect on
1994 pre-tax income would have approximated $2 million.
45
As of December 31, 1994 and 1993, the Company held the following
contracts to obtain U.S. dollars (in thousands):
1994 1993
---------------------- ----------------------
Notional Notional
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Forwards $264,783 $215,631
Swaps 65,155 40,334
---------- ----------
$329,938 $329,540 $255,965 $247,996
========== ========== ========== ==========
Fair value reflects the amount, based on dealer quotes, the Company
would receive at maturity for contracts involving the same currencies and
maturity dates, if they had been entered into as of year-end 1994 and 1993,
respectively.
As of December 31, 1994 and 1993, the Company held the following
contracts to purchase foreign currencies (in thousands):
1994 1993
---------------------- ----------------------
Notional Notional
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Forwards $ 57,898 $127,582
Swaps 124,746 91,790
---------- ----------
$182,644 $184,417 $219,372 $222,676
========== ========== ========== ==========
Fair value reflects the amount, based on dealer quotes, the Company
would pay at maturity for contracts involving the same currencies and
maturity dates, if they had been entered into as of year-end 1994 and 1993,
respectively.
The following table summarizes the Company's foreign currency
contracts by major currency as of December 31, 1994 and 1993 (in thousands
of U.S. dollars):
1994 1993
---------------------- ----------------------
Buy Sell Buy Sell
- --------------------------- ---------- ---------- ---------- ----------
U.S. dollars $329,938 $177,589 $255,965 $166,667
German deutschemarks 91,740 81,620 77,330 64,815
Italian lira - 15,240 52,705 35,327
Malaysian ringgits 5,034 - 61,311 -
Hong Kong dollars 47,809 - 13,566 -
French francs 18,481 57,685 - 66,515
British pounds sterling - 51,268 - 58,010
Canadian dollars 6,485 25,270 6,721 44,924
Spanish pesetas - 17,141 - 13,482
Dutch guilders - 46,926 - 11,411
Japanese yen - 17,757 - -
Australian dollars - 14,306 - -
Swiss francs 9,680 5,555 5,212 5,210
Other (under $5,000) 3,415 2,225 2,527 8,976
---------- ---------- ---------- ----------
$512,582 $512,582 $475,337 $475,337
========== ========== ========== ==========
In order to minimize the risk of counterparty non-performance, the
Company executes its foreign currency forward exchange contracts and swap
agreements with financial institutions believed to be credit-worthy,
generally those that provide the Company with its working capital lines of
credit. The Company does not trade in financial instruments nor does it
enter into contracts for speculative purposes.
Letters of Credit
- -----------------
The Company had outstanding irrevocable letters of credit in the amount of
$15.1 million and $31.8 million as of December 31, 1994 and 1993,
respectively. These letters of credit, which have terms from one month to
one year, collateralize the Company's obligations to third parties for the
purchase of inventory. The fair value of these letters of credit
approximates contract values based on the nature of the fee arrangements
with the issuing banks.
Litigation
- ----------
The Company is involved in various litigation and other legal matters,
including claims related to product liability and environmental cleanup,
which are being addressed or defended in the ordinary course of business.
Management believes that any liability which may potentially result upon
resolution of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 7 - ACQUISITIONS AND NONRECURRING ITEMS
- --------------------------------------------
On May 31, 1994, the Company acquired substantially all of the business
assets and assumed the associated debts and liabilities of Kransco, a San
Francisco-based designer, manufacturer and marketer of brand name
recreational and sporting products, including POWER WHEELS battery-powered,
ride-on vehicles; HULA HOOP and FRISBEE products marketed under the WHAM-O
trademark; STREET JAM sporting goods; and MOREY BOOGIE bodyboards. The
purchase price included net cash consideration of $254.6 million, including
costs directly related to the acquisition. In addition, the Company repaid
$20.0 million of Kransco's short-term borrowings concurrent with
consummation of the asset purchase transaction. The asset purchase
agreement also provides for future contingent consideration in the event
that net sales of the POWER WHEELS product line reaches or exceeds certain
levels in each of calendar years 1994, 1995 and 1996. The contingent
consideration payable with respect to any year shall not exceed $8.6
million. As of December 31, 1994, $8.6 million of contingent consideration
was payable, and as a result the goodwill initially recorded was increased.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of Kransco have been
included in the Company's consolidated financial statements since the date
of acquisition. The estimated fair market value of assets and liabilities
acquired was $99.4 million and $37.2 million, respectively. The excess of
the aggregate purchase price over the estimated fair market value of the
net assets acquired was approximately $221 million, which is being
amortized on a straight-line basis over 20 years.
46
The following summary presents unaudited pro forma consolidated
results of operations as if the acquisition had occurred at the beginning
of 1994 and 1993, and includes adjustments for estimated amounts of
goodwill amortization, depreciation of fixed assets acquired based on their
estimated fair values, increased interest expense assuming the initial
purchase consideration had resulted in additional short-term borrowing
during the periods presented, and the elimination of intercompany
transactions. The pro forma results are for illustrative purposes only,
and do not purport to be indicative of the actual results which would have
occurred had the transaction been consummated as of those earlier dates,
nor are they indicative of results of operations which may occur in the
future. These results reflect the highly seasonal nature of the business
acquired and do not reflect the synergies achieved.
For the Year
----------------------
(In thousands, except per share amounts) 1994 1993
- ---------------------------------------- ---------- ----------
Net sales $3,248,765 $2,876,080
---------- ----------
Income before extraordinary item and
cumulative effect of changes in
accounting principles $ 253,537 $ 142,012
---------- ----------
Net income $ 253,537 $ 123,309
========== ==========
PRIMARY INCOME PER COMMON SHARE
Income before extraordinary item and
cumulative effect of changes in
accounting principles $ 1.11 $ 0.64
---------- ----------
Net income $ 1.11 $ 0.56
========== ==========
FULLY DILUTED INCOME PER COMMON SHARE
Income before extraordinary item and
cumulative effect of changes in
accounting principles $ 1.10 $ 0.63
---------- ----------
Net income $ 1.10 $ 0.55
========== ==========
In July 1994, the Company acquired a majority of the shares of Spear,
a company organized in the United Kingdom, that holds the rights to
SCRABBLE in markets outside of the United States and Canada, and certain
other games worldwide. Under the terms of the Company's offer,
shareholders had the option to receive the purchase consideration of 11.5
pounds sterling per issued share in either cash, interest-bearing notes or
in a combination of cash and notes. As of December 31, 1994, holders of
5.1 million shares of Spear had elected the cash option, receiving
approximately 58 million pounds sterling, and holders of 0.3 million shares
had elected to receive notes. The aggregate purchase price, including
investment advisor and other directly related expenses, denominated in
pounds sterling, was approximately $100 million.
The acquisition has been accounted for by the purchase method and,
accordingly, the results of operations of Spear have been included in the
Company's consolidated financial statements since the date of acquisition.
The estimated fair market value of assets and liabilities acquired was
approximately $40 million and $35 million, respectively. The excess of
cost over the estimated fair market value of tangible net assets acquired
was approximately $95 million, which is being amortized on a straight-line
basis over 20 years.
In the 1994 fourth quarter, the Company recognized a $72.0 million pre-
tax charge against continuing operations in connection with the
consolidation of manufacturing operations and the reduction of headquarters
expense and support functions worldwide. Of these charges, approximately
$36 million was related to severance costs from elimination of
approximately 1,000 positions, $15 million represented restricted stock
awards that related to the Fisher-Price integration, $14 million for
termination of various distribution and lease agreements, $4 million for
the writedown of fixed assets to their net realizable value in connection
with the elimination of excess manufacturing capacity, and other costs of
$3 million. After related tax effects, the net $46.8 million charge
impacted 1994 earnings by $0.21 per share on a fully diluted basis.
Although no assurance can be given, the Company anticipates the
restructuring will provide pre-tax cost savings of approximately $25
million during 1995, principally as a result of creating efficiencies and
eliminating redundancies. Available cash reserves and cash flow generated
from normal business operations will fund the costs of the restructuring,
with no adverse impact expected on the Company's future liquidity, revenues
or financial position. It is anticipated that substantially all amounts
related to the restructuring will be expended during 1995.
On November 30, 1993, a merger was consummated between the Company and
Fisher-Price, one of the world's largest manufacturers and marketers of
infant and preschool toys and juvenile products. The stock-for-stock
transaction was approved by the shareholders of both companies, after which
Fisher-Price became a wholly-owned subsidiary of the Company. The merger
agreement provided for the exchange of 1.275 shares of Mattel common stock
for each outstanding Fisher-Price common share, and resulted in the
issuance of 39.1 million shares, before stock splits (61.1 million shares
after stock splits), valued, on the merger's effective date, at $1.19
billion. This transaction was accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect
retroactive restatement for the companies' combined financial position and
operating results. Prior to July 1, 1991, the business of Fisher-Price was
operated as a division of The Quaker Oats Company, and therefore, any such
financial data have been excluded from the Company's combined consolidated
results presented herein.
In connection with its merger with Fisher-Price, the Company
recognized a one-time charge of $115.0 million, pre-tax, in the 1993 fourth
quarter. Of the total, approximately $17 million represented transaction
costs of the merger, and $30 million related to the severance of key
Fisher-Price executives. Following the merger, the Company commenced
integrating and restructuring certain of the domestic and international
business operations of the entities. Of the remaining $68 million of
estimated costs, approximately $13 million represented writedowns of fixed
assets in
47
connection with the elimination of duplicative administration and
plant facilities. The remainder represented expenditures related to the
combination of the entities' worldwide business operations, including staff
reductions and outplacement expenses, costs of terminating contracts with
lessors and distributors and fees paid to consultants in connection with
the integration and restructuring process. After related tax effects, the
net $90.4 million charge impacted 1993 earnings by $0.40 per share on a
fully diluted basis.
As of December 31, 1994, the integration and restructuring activity
provided for by the 1993 charge was substantially complete and amounts
previously accrued had been paid. The cost savings realized by the Company
as a result of the consolidation of facilities and related staff reductions
were comparable to the anticipated $45 million, and the type and amount of
charges actually incurred approximated the amounts included in the
provision.
In 1992, the Company concluded its merger with International Games,
Inc. ("IGI"), a creator, manufacturer and marketer of proprietary family
and educational card and board games, including UNO and SKIP-BO. The
merger, accounted for as a pooling of interests, was effected by exchanging
all of IGI's outstanding voting preferred and common stock for 2.0 million
shares of Mattel common stock and 0.9 million shares of Mattel 12.5%
Convertible Preference Stock, Series F, representing a combined value of
$58.5 million.
NOTE 8 - FINANCIAL INFORMATION BY GEOGRAPHIC AREA
- -------------------------------------------------
The Company's business consists of the design, manufacture and marketing of
toys on a worldwide basis. The Company's international operations are
located principally in Europe, Canada, Latin America and Asia.
Consolidated liabilities of these subsidiaries were approximately $421
million, $300 million and $311 million at December 31, 1994, 1993 and 1992,
respectively.
The Company's toy products are sold throughout the world. 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. In the
United States, toys 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.
Internationally, the Company sells its products directly in Argentina,
Australia, Austria, the Benelux countries, Canada, Chile, France, Germany,
Greece, Italy, Japan, Mexico, New Zealand, Portugal, Scandinavia, Spain,
Switzerland, the United Kingdom, Venezuela, and in certain areas of Eastern
Europe and Asia. In 1995, the Company will begin selling its products
directly in Colombia through a newly established subsidiary. The Company's
products are marketed principally through distributors in certain parts of
Latin America, the Middle East and Southeast Asia, and the Company also
licenses some of its products to outside manufacturers for sale in Brazil,
Peru, and other Latin American countries. In the fourth quarter of 1993,
the Company's distributorship agreement for Nintendo products in Australia
was terminated. The Company ceased distribution of Nintendo products in
Canada and Italy during the first and third quarters of 1992, respectively.
The Company's worldwide sales to Toys R Us and Wal-Mart, the only
customers accounting for more than 10% of 1994 consolidated net sales, were
$734.1 million and $417.7 million, respectively. At December 31, 1994,
accounts receivable from Toys R Us and Wal-Mart were $156.6 million and
$104.3 million, respectively. In 1993, worldwide sales to Toys R Us and
Wal-Mart were $598.7 million and $277.3 million, respectively, and in 1992,
worldwide sales to Toys R Us were $466.4 million. At December 31, 1993,
accounts receivable from Toys R Us and Wal-Mart were $156.8 million and
$63.2 million, respectively.
Information by geographic area is set forth in the tables below.
Profit from operations represents income before income taxes, interest
expense and general corporate expenses. Sales between geographic areas are
based upon transfer prices which include manufacturing cost and profit.
Profit From Identifiable
(In thousands) Net Sales Operations Assets
- -------------- ----------- ------------ ------------
1994
United States $2,315,778 $305,874 $1,150,514
Europe and Canada 1,066,349 143,658 715,021
Asia and Latin America 1,287,502 130,247 396,100
----------- ------------ ------------
4,669,629 579,779 2,261,635
Sales and transfers between
geographic areas (a) (1,464,604) - -
Interest expense - (55,449) -
Corporate and other - (130,698) 197,391
----------- ------------ ------------
Consolidated total $3,205,025 $393,632 $2,459,026
=========== ============ ============
1993
United States $1,873,249 $187,923 $ 718,688
Europe and Canada 908,030 68,270 545,406
Asia and Latin America 993,001 96,924 290,759
----------- ------------ ------------
3,774,280 353,117 1,554,853
Sales and transfers between
geographic areas (a) (1,069,832) - -
Interest expense - (62,614) -
Corporate and other - (53,857) 445,224
----------- ------------ ------------
Consolidated total $2,704,448 $236,646 $2,000,077
=========== ============ ============
1992
United States $1,612,174 $226,193 $ 712,309
Europe and Canada 861,462 95,480 504,331
Asia and Latin America 844,917 66,461 286,185
----------- ------------ ------------
3,318,553 388,134 1,502,825
Sales and transfers between
geographic areas (a) (755,028) - -
Interest expense - (68,716) -
Corporate and other - (36,473) 209,850
----------- ------------ ------------
Consolidated total $2,563,525 $282,945 $1,712,675
=========== ============ ============
<FN>
(a) Primarily from Asia and Latin America to other regions of the world.
48
NOTE 9 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------
Due to seasonality of the Company's earnings, exclusion of antidilutive common
stock equivalents in certain periods and fluctuation in the Company's common
stock price, the sum of income per share amounts reported for each of the four
quarters may not equal income per share reported for the full year.
(In thousands, except per share First Second Third Fourth
amounts) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
Net sales $487,271 $650,263 $1,037,082 $1,030,409
Gross profit 238,104 314,505 528,960 519,934
Advertising and promotion expenses 71,630 94,010 161,298 189,547
Other selling and administrative
expenses 116,797 118,608 140,601 160,437
Restructuring charge (a) - - - 72,000
Other expense, net (b) 3,285 1,315 5,967 16,927
Operating profit (c) 46,392 100,572 221,094 81,023
Income before taxes 38,269 89,082 202,820 63,461
Net income 24,069 57,082 131,820 42,861
Preference stock dividend
requirements (1,223) (1,223) (1,152) (1,091)
Net income applicable to common
shares 22,846 55,859 130,668 41,770
Primary income per share (d):
Net income $0.10 $0.25 $0.58 $0.19
Average number of common and
common equivalent shares 218,796 224,723 225,930 224,493
Fully diluted income per share (d):
Net income $0.10 $0.25 $0.57 $0.19
Average number of common and
common equivalent shares 227,200 226,805 227,890 225,281
Dividends declared per common share (d) $0.048 $0.048 $0.048 $0.048
Common stock market price (d)
High $21.50 $21.80 $23.00 $23.60
Low 16.50 18.60 20.40 19.60
YEAR ENDED DECEMBER 31, 1993 (e)
Net sales $477,184 $576,618 $896,732 $753,914
Gross profit 218,770 279,013 453,935 374,549
Advertising and promotion expenses 68,489 83,390 139,392 135,427
Other selling and administrative
expenses 109,497 113,652 128,882 121,363
Integration and restructuring
charge (f) - - - 115,000
Other expense, net 560 3,819 5,378 2,158
Operating profit (c) 40,224 78,152 180,283 601
Income before taxes, extraordinary
item and accounting changes 27,015 63,223 163,370 (16,962)
Extraordinary item - debt
retirement - - - (14,681)
Cumulative effect of changes in
accounting principles (4,022) - - -
Net income 14,458 40,770 104,656 (42,676)
Preference stock dividend
requirements (1,224) (1,223) (1,224) (1,223)
Net income applicable to common
shares 13,234 39,547 103,432 (43,899)
Primary income per share (d):
Income before extraordinary item
and accounting changes $0.08 $0.19 $0.49 $(0.14)
Net income 0.06 0.19 0.49 (0.21)
Average number of common and
common equivalent shares 212,722 213,356 213,261 213,308
Fully diluted income per share (d):
Income before extraordinary item
and accounting changes $0.08 $0.18 $0.47 $(0.14)
Net income 0.07 0.18 0.47 (0.21)
Average number of common and
common equivalent shares 225,876 225,356 225,420 212,050
Dividends declared per common share (d) $0.032 $0.038 $0.038 $0.038
Common stock market price (d)
High $18.48 $16.88 $18.24 $19.68
Low 13.12 13.68 14.80 17.20
- ---------------------------------------------------------------------------------
<FN>
(a) Represents a nonrecurring charge principally related to the consolidation
of manufacturing operations and the reduction of headquarters expense and
support functions worldwide.
(b) Fourth quarter includes a $19.8 million foreign exchange transaction loss
resulting from devaluation of the Mexican peso.
(c) Represents income from operations before interest expense and provision for
income taxes.
(d) Per share data and market prices for all periods reflect the retroactive
effect of stock splits distributed to shareholders in January 1995 and 1994
and the November 1993 merger with Fisher-Price.
(e) Financial information for all quarters reflects the retroactive effect of
the November 1993 merger, accounted for as a pooling of interests, with
Fisher-Price.
(f) The nonrecurring charge represents transaction, integration and
restructuring costs related to the 1993 merger with Fisher-Price.
49
NOTE 10 - SUPPLEMENTAL FINANCIAL INFORMATION
- --------------------------------------------
As of Year End
-----------------------
(In thousands) 1994 1993
- ------------------------------------------ ----------- -----------
INVENTORIES INCLUDE THE FOLLOWING:
Raw materials and work in process $ 50,334 $ 50,927
Finished goods 288,809 169,066
---------- -----------
$339,143 $219,993
========== ===========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
INCLUDE THE FOLLOWING:
Deferred income taxes $114,808 $101,776
Other 67,867 45,087
---------- -----------
$182,675 $146,863
========== ===========
INTANGIBLE ASSETS, NET, INCLUDE THE
FOLLOWING:
Goodwill $418,903 $124,458
Other 13,329 14,819
---------- -----------
$432,232 $139,277
========== ===========
ACCRUED LIABILITIES INCLUDE THE
FOLLOWING:
Advertising and promotion $102,115 $ 80,396
Compensation 75,729 58,582
Restructuring charge 67,649 94,774
Other 207,653 164,048
---------- -----------
$453,146 $397,800
========== ===========
For the Year
-------------------------------
(In thousands) 1994 1993 1992
- ------------------------------------ --------- ---------- ----------
SELLING AND ADMINISTRATIVE EXPENSES
INCLUDE THE FOLLOWING:
Research and development $93,153 $75,415 $76,619
- -------------------------------------------------------------------------
Statements of Cash Flows
- ------------------------
For the years ended December 31, 1994, 1993 and 1992, cash paid for
interest totaled $52.9 million, $76.1 million and $67.8 million,
respectively. Cash paid for income taxes in each of the three years was
$66.3 million, $55.7 million and $72.5 million, respectively.
Significant noncash investing and financing activities were as
follows:
. During the 1994 first quarter, holders tendered $75.7 million aggregate
par value of the 8% Debentures for conversion into 7.4 million shares of
the Company's common stock. During the 1993 fourth quarter, holders
tendered $24.3 million aggregate par value of the 8% Debentures for
conversion into 2.4 million shares of the Company's common stock.
. The November 1993 merger with Fisher-Price in a stock-for-stock
transaction neither used nor provided cash (see Note 7). The Company's
consolidated financial statements, consistent with pooling of interests
accounting treatment, reflect retroactive restatement for the effects of
the merger. Accordingly, the assets and liabilities of Fisher-Price and
the changes in shareholders' equity as a result of the merger are
included in the combined consolidated financial statements as of July 1,
1991, but are not includable as of December 1990 while Fisher-Price was
a division of The Quaker Oats Company. Because the merger transaction
neither provided nor used cash with respect to the combined companies,
the effect of consolidating financial statement balances as of July 1,
1991 is not reflected in the statements of cash flows.
. The effects of changes in accounting principles related to the Company's
adoption of Statements of Financial Accounting Standards Nos. 106 and
109 in the 1993 first quarter neither provided nor used cash, and
accordingly, have been excluded from the statement of cash flows.
50
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
-----------------------------------------------------------
Management is responsible for the preparation of the Company's consolidated
financial statements and the related financial and nonfinancial information
appearing in this Annual Report. The financial statements have been
prepared in accordance with generally accepted accounting principles and,
in the opinion of management, present fairly the Company's financial
position, results of operations and cash flows. The financial statements
necessarily contain some amounts that are based on the best estimates and
judgments of management.
The Company maintains accounting and internal control systems which
management believes are adequate to provide reasonable assurance, in
relation to reasonable cost, as to the integrity and reliability of the
financial statements and as to protection of assets from unauthorized use
or disposition. The selection and training of qualified personnel, the
establishment and communication of accounting and administrative policies
and procedures, and a program of internal audit are important elements of
these control systems.
The Company's internal auditors are directed to examine the adequacy
and effectiveness of the Company's system of internal accounting,
administrative and operational controls. They conduct formal and
systematic reviews to determine that operations are adequately controlled
and to assure that assets are effectively safeguarded.
The Board of Directors has appointed an audit committee, composed
entirely of nonemployee directors. The committee meets regularly with
financial management, internal auditors and the independent accountants to
review accounting control, auditing and financial reporting matters.
Price Waterhouse, independent accountants, have been retained to audit
the Company's consolidated financial statements. They conduct a review of
internal accounting controls to the extent required by generally accepted
accounting principles and perform such tests and related procedures as they
deem necessary to arrive at an opinion on the fairness of the financial
statements.
/s/ Francesca Luzuriaga
- -----------------------
Francesca Luzuriaga
Executive Vice President, Finance
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders of Mattel, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of income, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Mattel, Inc.
and its subsidiaries at December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the 1992
financial statements of Fisher-Price, Inc. and its subsidiaries, which
statements reflect total assets of $455,198,000 at January 3, 1993 and
total net sales of $693,951,000 for the period ended January 3, 1993.
Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts included for Fisher-Price, Inc. and its
subsidiaries, is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- ------------------------
Los Angeles, California
February 6, 1995
51
DIRECTORS AND OFFICERS
----------------------
Mattel, Inc. and Subsidiaries
BOARD OF DIRECTORS EXECUTIVE OFFICERS
John W. Amerman (1) John W. Amerman
Chairman and Chief Executive Officer, Chairman and Chief Executive Officer
Mattel, Inc.
Jill E. Barad (4) Jill E. Barad
President and Chief Operating Officer, President and Chief Operating Officer
Mattel, Inc.
Dr. Harold Brown (4) James A. Eskridge
Senior Managing Director, E.M. Warburg, President, Fisher-Price, Inc.
Pincus & Co., Inc.
James A. Eskridge Joseph C. Gandolfo
President, Fisher-Price, Inc. President, Mattel Operations
Tully M. Friedman (1)(3) Lindsey F. Williams
Co-Managing Partner, Hellman & Friedman President, Mattel International
Ronald M. Loeb (3) Francesca Luzuriaga
Partner, Irell & Manella Executive Vice President, Finance
Edward H. Malone (1)(2)(4) E. Joseph McKay
Retired Vice President, General Electric Co. Senior Vice President, Human Resources
and Administration
Edward N. Ney Ned Mansour
Chairman of the Board of Advisors, Senior Vice President, General Counsel
Burson-Marsteller and Secretary
William D. Rollnick (1)(2)(3) Gary P. Rolfes
Chairman, Genstar Rental Electronics, Inc. Senior Vice President and Controller
John L. Vogelstein (1)(2)(3) William Stavro
Vice Chairman and Director, E.M. Warburg, Vice President and Treasurer
Pincus & Co., Inc.
Lindsey F. Williams (4)
President, Mattel International
<FN>
(1) Member, Executive/Finance Committee
John L. Vogelstein, Chairman
(2) Member, Compensation/Options Committee
John L. Vogelstein, Chairman
(3) Member, Audit Committee
William D. Rollnick, Chairman
(4) Member, Pension Committee
Edward H. Malone, Chairman
52
CORPORATE INFORMATION
---------------------
Mattel, Inc. and Subsidiaries
Transfer Agent Mattel, Inc. Common Stock
and Registrar The First National Bank of Boston
Mattel, Inc. 12.5% Convertible Preference Stock, Series F
Mattel, Inc.
333 Continental Boulevard
El Segundo, California 90245
Note Trustees Mattel, Inc. 6-3/4% Senior Notes due May 15, 2000
PNC Bank, N.A.
One Oliver Plaza, 23rd Floor
Pittsburgh, Pennsylvania 15265
Mattel, Inc. 6-7/8% Senior Notes due August 1, 1997
The First National Bank of Boston
150 Royall Street, Mail Stop 45-02-15
Canton, Massachusetts 02021 or
P.O. Box 1618, Boston, Massachusetts 02105
Mattel, Inc. Medium-Term Notes
Chemical Trust Company of California
300 South Grand Avenue
Los Angeles, California 90071
Stock Mattel, Inc. Common Stock and Mattel, Inc. Preference Share
Exchange Purchase Rights
Listings New York and Pacific Stock Exchanges
Mattel, Inc. 6-7/8% Senior Notes due August 1, 1997
New York Stock Exchange
Shareholder Inquiries relating to shareholder accounting records, stock
Administration transfer and dividends (including dividend reinvestment)
should be directed to:
The First National Bank of Boston
Shareholder Services Division
150 Royall Street, Canton Massachusetts 02021 or
P.O. Box 644, Boston, Massachussetts 02102
Telephone: 617-575-3170 or 800-730-4001
Common As of March 1, 1995, there were approximately 37,000 holders
Shareholders of record of Mattel, Inc. Common Stock
Annual Meeting The Annual Meeting of Shareholders will be held May 10, 1995,
at 10:00 a.m. in the Manhattan Ballroom of the Radisson Plaza
Hotel, Manhattan Beach, California
Form 10-K Mattel's Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1994,
is available upon request by writing to the Secretary of the
Company, 333 Continental Boulevard, El Segundo, California
90245
Trademark Cabbage Patch Kids is a trademark of Original Appalachian
Legends Artworks, Inc., used under license. Disney characters:
[copyright]The Walt Disney Company. Nickelodeon is licensed
for use by MTV Networks, a division of Viacom, Inc.
Barbie, Fisher-Price, Hot Wheels, Power Wheels, Morey Boogie,
Wham-O, Frisbee, Hula Hoop, Hacky Sack, UNO, and Skip-Bo are
trademarks of Mattel, Inc.
[copyright]1995 Mattel, Inc.
All Rights Reserved
Printed in U.S.A.
Printed on recycled paper.
53