SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
----------------------------------
MATTEL, INC.
------------
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
- ------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
--------------
(Former name, former address and former fiscal year, None
if changed since last report) --------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Number of shares outstanding of registrant's common stock
as of November 8, 1996:
Common Stock - $1 par value -- 271,784,790 shares
PART I -- FINANCIAL INFORMATION
-------------------------------
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 1996 1995 1995
- -------------- ----------- ----------- -----------
ASSETS
Current Assets
Cash $ 97,094 $ 84,221 $ 466,082
Marketable securities - 16,596 17,375
Accounts receivable, net 1,232,905 1,313,760 679,283
Inventories 477,571 463,037 350,841
Prepaid expenses and other current assets 205,039 201,380 177,238
----------- ----------- -----------
Total current assets 2,012,609 2,078,994 1,690,819
----------- ----------- -----------
Property, Plant and Equipment
Land 28,387 25,997 25,724
Buildings 206,117 192,293 192,323
Machinery and equipment 399,643 348,943 354,469
Capitalized leases 24,271 24,271 24,271
Leasehold improvements 57,868 50,978 51,629
----------- ----------- -----------
716,286 642,482 648,416
Less: accumulated depreciation 292,920 269,936 265,885
----------- ----------- -----------
423,366 372,546 382,531
Tools, dies and molds, net 139,186 114,030 116,783
----------- ----------- -----------
Property, plant and equipment, net 562,552 486,576 499,314
----------- ----------- -----------
Other Noncurrent Assets
Intangible assets, net 399,927 424,654 422,796
Sundry assets 111,246 72,260 82,580
----------- ----------- -----------
$ 3,086,334 $ 3,062,484 $ 2,695,509
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial information.
2
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
Sept. 30, Sept. 30, Dec. 31,
(In thousands, except share data) 1996 1995 1995
- --------------------------------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 318,104 $ 243,390 $ 15,520
Current portion of long-term liabilities 105,216 31,939 33,215
Accounts payable 226,647 233,863 250,401
Accrued liabilities 414,227 470,058 410,362
Income taxes payable 191,510 229,752 138,183
----------- ----------- -----------
Total current liabilities 1,255,704 1,209,002 847,681
----------- ----------- -----------
Long-Term Liabilities
6-7/8% Senior Notes due 1997 - 99,713 99,752
6-3/4% Senior Notes due 2000 100,000 100,000 100,000
Medium-Term Notes 220,000 220,000 220,000
Mortgage note 44,245 44,693 44,585
Other 116,540 105,746 108,322
----------- ----------- -----------
Total long-term liabilities 480,785 570,152 572,659
----------- ----------- -----------
Shareholders' Equity
Preference stock - 9 -
Common stock $1.00 par value, 600.0 million
shares authorized with 279.1 million
shares issued (a) 279,058 223,254 279,058
Additional paid-in capital 116,354 233,750 103,512
Treasury stock at cost; 8.8 million shares,
2.7 million shares and 3.6 million shares,
respectively (a) (228,039) (53,489) (75,574)
Retained earnings (b) 1,256,406 939,992 1,041,735
Currency translation and other
adjustments (b) (73,934) (60,186) (73,562)
----------- ----------- -----------
Total shareholders' equity 1,349,845 1,283,330 1,275,169
----------- ----------- -----------
$ 3,086,334 $ 3,062,484 $ 2,695,509
=========== =========== ===========
<FN>
(a) Share data for September 1995 have been restated for the effect of the five-for-four stock
split declared in February 1996.
(b) Since December 26, 1987.
See accompanying notes to consolidated financial information.
3
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the For the
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands, except per share amounts) 1996 1995 1996 1995
- ---------------------------------------- ---------- ---------- ---------- ----------
Net Sales $1,232,179 $1,176,484 $2,595,413 $2,483,528
Cost of sales 592,909 593,535 1,291,812 1,274,865
---------- ---------- ---------- ----------
Gross Profit 639,270 582,949 1,303,601 1,208,663
Advertising and promotion expenses 187,291 182,355 369,947 367,673
Other selling and administrative expenses 173,542 159,359 471,085 432,775
Interest expense 21,795 22,734 52,491 51,804
Other expense (income), net 7,735 (9,025) 18,693 (13,169)
---------- ---------- ---------- ----------
Income Before Income Taxes 248,907 227,526 391,385 369,580
Provision for income taxes 80,900 76,200 127,200 123,800
---------- ---------- ---------- ----------
Net Income 168,007 151,326 264,185 245,780
Preference stock dividend requirements - 1,099 - 3,297
---------- ---------- ---------- ----------
Net Income Applicable to Common Shares $ 168,007 $ 150,227 $ 264,185 $ 242,483
========== ========== ========== ==========
Primary Income Per Common And Common
Equivalent Share
- ------------------------------------
Net income $ 0.61 $ 0.53 $ 0.95 $ 0.86
========== ========== ========== ==========
Average number of common and common
equivalent shares 276,939 281,904 279,395 280,964
========== ========== ========== ==========
Dividends Declared Per Common Share $ 0.060 $ 0.048 $ 0.180 $ 0.144
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial information.
4
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
Nine Months Ended
-----------------------
Sept. 30, Sept. 30,
(In thousands) 1996 1995
- -------------- ---------- ----------
Cash Flows From Operating Activities:
- -------------------------------------
Net income $ 264,185 $ 245,780
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 110,130 93,290
Gain on sale of business - (9,142)
Deferred compensation (5,053) 6,918
(Increase) in accounts receivable (564,832) (557,433)
(Increase) in inventories (129,353) (123,383)
(Increase) in prepaid expenses and other current assets (1,740) (20,825)
Increase in accounts payable, accrued liabilities and
income taxes payable 54,313 13,637
Other, net 12,310 (8,491)
---------- ----------
Net cash flows used for operating activities (260,040) (359,649)
---------- ----------
Cash Flows From Investing Activities:
- -------------------------------------
Purchases of tools, dies and molds (70,235) (69,893)
Purchases of other property, plant and equipment (85,613) (83,478)
Purchases of marketable securities (8,000) (28,014)
Purchase of other long-term investment (25,050) -
Proceeds from sale of business - 21,129
Proceeds from sales of other property, plant and equipment 2,226 3,179
Proceeds from sales of marketable securities 25,315 31,588
Contingent consideration - investment in acquired business (8,625) (8,625)
Other, net (91) 730
---------- ----------
Net cash flows used for investing activities (170,073) (133,384)
---------- ----------
Cash Flows From Financing Activities:
- -------------------------------------
Short-term borrowings 303,826 245,258
Issuance of Medium-Term Notes - 139,500
Payment of Medium-Term Notes (30,000) -
Long-term foreign borrowing (3,610) (923)
Tax benefit of employee stock options exercised 18,128 7,713
Exercise of stock options 43,407 24,521
Purchase of treasury stock (222,273) (40,002)
Dividends paid on common and preference stock (46,378) (40,633)
Other, net (338) (216)
---------- ----------
Net cash flows from financing activities 62,762 335,218
Effect of Exchange Rate Changes on Cash (1,637) 2,936
---------- ----------
(Decrease) in Cash (368,988) (154,879)
Cash at Beginning of Period 466,082 239,100
---------- ----------
Cash at End of Period $ 97,094 $ 84,221
========== ==========
<FN>
See accompanying notes to consolidated financial information.
5
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments considered necessary for a
fair presentation of the Company's financial position and interim
results as of and for the periods presented have been included. Certain
amounts in the financial statements for prior periods have been
reclassified to conform with the current year presentation. Because the
Company's business is seasonal, results for interim periods are not
necessarily indicative of those which may be expected for a full year.
The financial information included herein should be read in conjunction
with the Company's consolidated financial statements and related notes
in its 1995 Annual Report to Shareholders.
2. Accounts receivable are shown net of allowances for doubtful accounts of
$15.3 million (September 30, 1996), $14.8 million (September 30, 1995)
and $10.8 million (December 31, 1995).
3. Inventories are comprised of the following:
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 1996 1995 1995
- -------------- --------- --------- ---------
Raw materials and work in progress $ 71,867 $ 72,748 $ 52,528
Finished goods 405,704 390,289 298,313
--------- --------- ---------
$ 477,571 $ 463,037 $ 350,841
========= ========= =========
4. Supplemental disclosure of cash flow information:
For the Nine Months Ended
-------------------------
Sept. 30, Sept. 30,
(In thousands) 1996 1995
- -------------- ---------- -----------
Cash paid during the period for:
Income taxes $ 50,714 $ 54,807
Interest 41,452 43,187
Noncash investing and financing
activities:
Issuance of stock warrant 26,444 -
- ---------------------------------------------------------------------
6
5. In June 1996, the Company entered into a license agreement with The Walt
Disney Company for an expanded strategic alliance, which guarantees the
Company worldwide toy rights for all upcoming Disney television and film
properties. The agreement spans three years, with the Company having
the right for two additional years to market merchandise from film
properties produced during the third year. The initial term of the
agreement may be renewed for an additional three-year period upon mutual
agreement. Pursuant to the agreement, the Company committed to certain
guaranteed royalty payments and issued Disney a warrant to purchase 3.0
million shares of the Company's common stock. The fair value of the
warrant will be charged to income as a component of royalty expense at
the time the related revenues are recognized.
6. In the current quarter, the Board of Directors declared cash dividends
of $0.060 per common share, compared to $0.048 per common share in the
third quarter of 1995.
7. Share and per share data presented in these financial statements reflect
the retroactive effects of the five-for-four stock split declared in
February 1996.
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. 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.
7
MATTEL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
THE FOLLOWING CAUTIONARY STATEMENT IS INCLUDED IN THIS QUARTERLY REPORT
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995:
FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY WHICH ARE INCLUDED
HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH
STATEMENTS. THESE INCLUDE WITHOUT LIMITATION: THE COMPANY'S DEPENDENCE
ON THE TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER ACCEPTANCE OF NEW
PRODUCTS; POSSIBLE WEAKNESSES OF INTERNATIONAL MARKETS; THE IMPACT OF
COMPETITION ON REVENUES AND MARGINS; THE EFFECT OF CURRENCY FLUCTUATIONS
ON REPORTABLE INCOME; AND OTHER RISKS AND UNCERTAINTIES AS MAY BE
DETAILED FROM TIME TO TIME IN THE COMPANY'S PUBLIC ANNOUNCEMENTS AND SEC
FILINGS.
Mattel, Inc. (the "Company") designs, manufactures, markets and distributes
a broad variety of toy products on a worldwide basis. The Company's
business is dependent in great part on its ability each year to redesign,
restyle and extend existing core products and product lines and to design
and develop innovative new toys and product lines. New products have
limited lives, ranging from one to three years, and generally must be
updated and refreshed each year.
Core brands have historically provided the Company with relatively stable
growth. The Company's principal core brands are: i) BARBIE fashion dolls
and doll clothing and accessories; ii) FISHER-PRICE toys and juvenile
products, including the POWER WHEELS line of battery-powered, ride-on
vehicles; iii) the Company's Disney-licensed toys; and iv) die-cast HOT
WHEELS vehicles and playsets; each of which has broad worldwide appeal.
Additional product lines consist of large dolls, including CABBAGE PATCH
KIDS; preschool toys, including SEE `N SAY talking toys; the UNO and SKIP-
BO card games; the SCRABBLE game, which the Company owns in markets outside
of the United States and Canada; and other toy products.
8
RESULTS OF OPERATIONS
---------------------
The Company's business is seasonal, and, therefore, results of operations
are comparable only with corresponding periods. Following is a percentage
analysis of operating results:
For the For the
Three Months Ended Nine Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales 100% 100% 100% 100%
=========== =========== =========== ===========
Gross profit 52% 50% 50% 49%
Advertising and promotion expenses 15 16 14 15
Other selling and administrative expenses 15 13 19 17
----------- ----------- ----------- -----------
Operating profit 22 21 17 17
Interest expense 2 2 2 2
----------- ----------- ----------- -----------
Income before income taxes 20% 19% 15% 15%
=========== =========== =========== ===========
THIRD QUARTER
- -------------
Net sales in the third quarter of 1996 increased $55.7 million or 5% over
the 1995 third quarter, reflecting increased demand for the Company's
principal core products, partially offset by a decrease in other product
lines. Worldwide revenues from principal core products represented 86% of
the Company's third quarter gross revenues compared to 82% in the third
quarter of 1995. The Company's principal core brands increased 11%, mainly
due to greater demand for BARBIE and BARBIE-related products, which
increased 26%, and HOT WHEELS vehicles and playsets, which increased 29%.
These increases were partially offset by a 7% decrease in Fisher-Price. In
addition, sales of other products decreased $43.4 million, primarily due to
lower 1996 third quarter sales of POLLY POCKET and Nickelodeon toys,
partially offset by an increase in CABBAGE PATCH KIDS sales. Net sales to
customers within the United States grew 6% and accounted for 63% of
consolidated sales in the 1996 and 1995 third quarters. Net sales to
customers outside the United States increased 2%, including an unfavorable
effect of $7.4 million from the generally stronger US dollar relative to
the year-ago quarter. At comparable foreign currency exchange rates, net
sales internationally grew 4%.
Gross profit as a percentage of net sales increased two percentage points
to 52% over the year-ago quarter, principally as a result of lower resin
and other commodity prices and improved product mix.
Advertising and promotion expenses decreased as a percentage of net sales
compared to the third quarter of 1995. The decrease reflects the Company's
ongoing effort to manage expense growth relative to increasing revenue
growth. As a percentage of net sales, other selling and administrative
expenses increased two percentage points to 15%. This growth reflects
higher design and development expenses related to new products, increased
sales and marketing expenditures to support development of the Company's
brands, and higher depreciation expense related to increased investment in
fixed assets. In addition, other expense, net, increased $16.8 million,
principally due to nonrecurring third quarter 1995 gains recognized on the
sale of the non-toy business and trademark rights related to Corgi, and
foreign currency transactions.
9
Interest expense decreased $0.9 million or 4% compared to the third quarter
of 1995 primarily as a result of lower worldwide short-term interest rates.
NINE MONTHS
- -----------
Net sales increased $111.9 million or 5% over 1995, reflecting continued
worldwide demand for the Company's principal core products, partially
offset by a decrease in other product lines. Worldwide principal core
product sales accounted for 86% of year-to-date gross sales compared to 83%
during 1995. The Company's principal core brands increased 9%, mainly due
to greater demand for BARBIE and BARBIE-related products, which increased
18%, and HOT WHEELS vehicles and playsets, which increased 17%. Sales of
other products decreased $55.5 million, primarily due to lower 1996 sales
of POLLY POCKET and Nickelodeon toys, partially offset by an increase in
CABBAGE PATCH KIDS sales. Net sales to customers within the United States
increased 7% and accounted for 64% of consolidated net sales compared to
63% in 1995. Net sales to customers outside the United States increased
1%, including an unfavorable effect of $18.8 million from the generally
stronger US dollar relative to the year-ago period. At comparable foreign
currency exchange rates, net sales internationally grew 3%.
Gross profit, as a percentage of net sales, increased one percentage point
to 50% over the year-ago period, primarily due to lower resin and other
commodity prices and a favorable product mix.
Advertising and promotion expenses decreased as a percentage of net sales
to 14%, compared to 15% in the year-ago period. The decrease reflects the
Company's ongoing effort to manage expense growth relative to increasing
revenue growth. As a percentage of net sales, other selling and
administrative expenses increased two percentage points to 19%, reflecting
higher design and development expenses related to new products, increased
sales and marketing expenditures to support development of the Company's
brands, and higher depreciation expense related to increased investment in
fixed assets. In addition, other expense, net, increased $31.9 million,
principally due to nonrecurring 1995 gains recognized on the sale of the
non-toy business and trademark rights related to Corgi, a Mexican insurance
claim, and foreign currency transactions.
Interest expense increased $0.7 million or 1% from 1995 levels, which
reflects higher average levels of domestic seasonal borrowings to support
increased sales volume, partially offset by lower short-term interest
rates.
FINANCIAL CONDITION
-------------------
The Company's financial position remained strong as of September 30, 1996
as a result of profitable operating results. The Company's cash position,
including marketable securities, as of September 30, 1996 was $97.1
million, compared to $100.8 million as of the third quarter 1995. Cash
decreased $386.4 million since December 31, 1995 primarily due to funding
of seasonal working capital needs, purchases of treasury stock, and
repayment of $30.0 million in Medium-Term Notes.
10
Accounts receivable decreased $80.9 million over the year-ago quarter,
reflecting higher sales of certain trade receivables in 1996, partially
offset by increased sales during the period. Since year end, accounts
receivable increased $553.6 million mainly due to current year sales volume
and seasonal customer payment patterns, partially offset by the sale of
certain trade receivables. Inventory balances increased $126.7 million
since year end and $14.5 million over the 1995 quarter end, primarily due
to a continuing trend toward just-in-time ordering by retailers, and level
loading of the Company's factories in order to maximize production
efficiency.
Short-term borrowings increased $74.7 million compared to the 1995 quarter
end and $302.6 million since year end in order to fund the Company's
seasonal working capital requirements. Seasonal financing needs for the
next twelve months are expected to be satisfied through internally
generated cash, issuance of commercial paper, sale of certain trade
receivables, and use of the Company's various short-term bank lines of
credit.
Details of the Company's capitalization are as follows:
(In millions) Sept. 30, 1996 Sept. 30, 1995 Dec. 31, 1995
- ------------- ----------------------------------------------
6-3/4% Senior notes $ 100.0 5% $ 100.0 6% $ 100.0 6%
Medium-Term Notes 220.0 12 220.0 12 220.0 12
6-7/8% Senior notes - - 99.7 5 99.8 5
Other long-term debt
obligations 55.2 3 63.6 3 61.1 3
-----------------------------------------------
Total long-term debt 375.2 20 483.3 26 480.9 26
Other long-term liabilities 105.6 6 86.9 5 91.7 5
Shareholders' equity 1,349.8 74 1,283.3 69 1,275.2 69
----------------------------------------------
$1,830.6 100% $1,853.5 100% $1,847.8 100%
==============================================
Total long-term debt decreased as a percentage of total capitalization
compared to the year-ago quarter, primarily due to the reclassification of
6-7/8% Senior Notes to current portion of long-term liabilities, and the
increase in shareholders' equity. Future long-term capital needs are
expected to be satisfied through retention of corporate earnings and the
issuance of long-term debt instruments. In February 1996, the Company
filed a universal shelf registration statement which will allow for the
issuance of up to $350 million of debt and equity securities, which could
include Medium-Term Notes. Shareholders' equity increased $74.6 million
since December 31, 1995 and $66.5 million over the 1995 third quarter
principally as a result of the Company's profitable operating results,
exercises of employee stock options, and issuance of a stock warrant in
connection with a license agreement with The Walt Disney Company, partially
offset by treasury stock purchases and dividends declared to common
shareholders. In addition, the increase over the 1995 third quarter was
partially offset by the repurchase of Series F Preference Stock from the
International Games, Inc. Employee Stock Ownership Plan.
11
PART II -- OTHER INFORMATION
----------------------------
ITEM 1. Legal Proceedings
- --------------------------
The Greenwald Litigation and Related Matters
- --------------------------------------------
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC
025 008) against the Company in Superior Court of the State of
California, County of Los Angeles (the "Greenwald Action"). The
plaintiff is a former Mattel employee who was terminated by the
Company in July 1995. The complaint seeks $50 million in general and
special damages, plus punitive damages, for (i) breach of oral,
written and implied contract, (ii) wrongful termination in violation
of public policy, and (iii) violation of California Labor Code Section
970. The plaintiff claims that her termination resulted from
complaints made by her to management concerning (i) general
allegations that Mattel did not account properly for sales and certain
costs associated with sales; and (ii) more specific allegations that
Mattel failed to account properly for certain royalty obligations to
The Walt Disney Company ("Disney"). On September 26, 1996, a hearing was
held regarding the Company's motion for summary adjudication of the
plaintiff's public policy claim. The hearing was continued until
December 5, 1996 pending deposition by the plaintiff of a former
Mattel officer.
The Company believes the allegations of the complaint in the Greenwald
Action are without merit and intends to defend the action vigorously.
In April 1996, the Audit Committee of the Company's Board of Directors
commenced an investigation with the assistance of the law firm of
Davis Polk & Wardwell ("Davis Polk") and the accounting firm of
Ernst & Young. In July 1996, Davis Polk and Ernst & Young issued a
report to the Audit Committee in which they stated that they had found
no evidence that Mattel accounted for sales and costs associated with
sales in a manner which is inconsistent with generally accepted
accounting principles ("GAAP"). With respect to Disney royalty
obligations, Davis Polk and Ernst & Young concluded that Mattel's
accounting treatment for the Disney royalties represented a reasonable
application of GAAP given the facts and circumstances as they existed
at the time the accounting decisions were made.
The Securities and Exchange Commission (the "Commission") has made
inquiries of the Company regarding certain of Ms. Greenwald's
allegations and the matters that are the subject of the report
prepared for the Audit Committee, including in connection with a
review of the Company's Annual Report on Form 10-K for the year ended
December 31, 1995. On November 6, 1996, the staff of the Division of
Corporation Finance of the Commission sent a letter to the Company
questioning the Company's decisions not to accrue for certain royalty
shortfalls and requesting supplemental information from the Company.
The Company believes that its accounting treatment, in which Price
Waterhouse LLP, the Company's independent auditors, concurred, was proper.
The same conclusion was reached by Davis Polk and Ernst & Young in the report
they prepared for the Audit Committee. However, had the Company made
the accruals in question, the effect would have been to reduce the
Company's net income by $7.7 million in 1994 (3.0% of net income) and
$1.3 million in 1995 (0.4% of net income).
12
The staff of the Division of Corporation Finance has also requested
further information from the Company concerning the foregoing
subjects. The Company intends to respond to the staff's requests.
The Lewis Action
- ----------------
On April 23, 1996, a purported class and derivative action entitled
Lewis v. Vogelstein et al. (Case No. 14954) was commenced in the
Delaware Court of Chancery, New Castle County (the "Lewis Action")
against the Company and its directors. The plaintiff alleges that the
directors of the Company breached their fiduciary duties by causing
the Company to adopt the Mattel 1996 Stock Option Plan (the "1996
Plan"). Specifically, the plaintiff alleges that the formula option
grants to non-employee directors as permitted by the 1996 Plan
constitute corporate waste. The complaint seeks (i) to have the case
certified as a class action, (ii) to have the 1996 Plan declared void,
(iii) a preliminary and permanent injunction enjoining the grant of
stock options to non-employee directors under the 1996 Plan, and (iv)
attorney's fees. The 1996 Plan was approved by the Company's
stockholders on May 8, 1996. Mattel's motion to dismiss the Lewis
Action was heard on October 29, 1996. The court has taken the motion
under advisement.
The Company believes the allegations of the complaint in the Lewis
Action are without merit and intends to defend the action vigorously.
13
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
10.1 Receivables Purchase Agreement dated September 13, 1996 among
the Company, Mattel Sales Corp., Fisher-Price, Inc., and
Bank of America N.T.S.A.
10.2 Mattel, Inc. Amended & Restated 1996 Stock Option Plan
10.3 Form of Option Agreement for Outside Directors under the
Mattel, Inc Amended & Restated 1996 Stock Option Plan
11.0 Computation of Income per Common and Common Equivalent Share
27.0 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
-------------------
Mattel, Inc. filed the following Current Reports on Form 8-K during
the quarterly period ended September 30, 1996:
Financial
Date of Report Items Reported Statements Filed
--------------- -------------- ----------------
July 2, 1996 5, 7 None
July 17, 1996 5, 7 None
July 18, 1996 5, 7 None
July 22, 1996 5 None
August 8, 1996 5, 7 None
August 22, 1996 5, 7 None
14
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MATTEL, INC.
------------
(Registrant)
Date: As of November 14, 1996 By: /s/ Kevin M. Farr
----------------------- -----------------------
Kevin M. Farr
Senior Vice President
and Controller
15