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 June 30, 1997
-------------
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 August 11, 1997:
Common Stock - $1 par value -- 290,452,640 shares
PART I -- FINANCIAL INFORMATION
-------------------------------
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30, Dec. 31,
(In thousands) 1997 1996 1996
- - -------------- ----------- ----------- -----------
ASSETS
Current Assets
Cash $ 58,989 $ 91,996 $ 550,271
Accounts receivable, net 1,315,815 1,135,765 948,940
Inventories 552,463 562,922 444,178
Prepaid expenses and other current assets 194,962 225,602 195,673
----------- ----------- -----------
Total current assets 2,122,229 2,016,285 2,139,062
----------- ----------- -----------
Property, Plant and Equipment
Land 35,221 25,569 30,864
Buildings 215,446 207,141 216,523
Machinery and equipment 458,401 409,775 438,969
Capitalized leases 25,374 26,649 26,512
Leasehold improvements 74,721 65,402 69,732
----------- ----------- -----------
809,163 734,536 782,600
Less: accumulated depreciation 344,792 306,516 323,096
----------- ----------- -----------
464,371 428,020 459,504
Tools, dies and molds, net 153,980 149,148 156,777
----------- ----------- -----------
Property, plant and equipment, net 618,351 577,168 616,281
----------- ----------- -----------
Other Noncurrent Assets
Intangible assets, net 590,145 616,045 611,410
Sundry assets 236,697 168,200 214,389
----------- ----------- -----------
$ 3,567,422 $ 3,377,698 $ 3,581,142
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for all periods have been restated retroactively for the effects of
the March 1997 merger with Tyco Toys, Inc. ("Tyco"), accounted for as a pooling of
interests. See Note 7.
2
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, June 30, Dec. 31,
(In thousands, except share data) 1997 1996 1996
- - --------------------------------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 164,991 $ 263,772 $ 28,924
Current portion of long-term liabilities 231,708 2,101 106,596
Accounts payable 216,220 232,959 312,378
Accrued liabilities 523,018 315,409 510,691
Income taxes payable 120,033 149,384 183,288
----------- ----------- -----------
Total current liabilities 1,255,970 963,625 1,141,877
----------- ----------- -----------
Long-Term Liabilities
6-7/8% Senior notes due 1997 - 99,830 -
6-3/4% Senior notes due 2000 100,000 100,000 100,000
Senior Subordinated Notes - 126,500 126,500
Convertible Subordinated Notes 16,034 16,034 16,034
Medium-Term Notes 380,000 220,000 220,000
Mortgage notes 43,836 48,023 47,600
Other 127,424 120,385 123,208
----------- ----------- -----------
Total long-term liabilities 667,294 730,772 633,342
----------- ----------- -----------
Shareholders' Equity
Preferred stock, Series B $1.00 par value,
$1,050.00 liquidation preference per share,
53.6 thousand shares authorized, issued and
outstanding 54 54 54
Preferred stock, Series C $1.00 par value,
$125.00 liquidation preference per share,
772.8 thousand shares authorized, issued and
outstanding 773 773 773
Common stock $1.00 par value, 600.0 million
shares authorized; 296.7 million
shares issued at June 30, 1997 and
296.1 million shares issued at June 30,
1996 and December 31, 1996 296,729 296,091 296,091
Additional paid-in capital 506,224 544,767 518,296
Treasury stock at cost; 5.8 million shares,
4.1 million shares and 8.1 million shares,
respectively (162,269) (103,478) (215,999)
Retained earnings 1,122,343 1,043,687 1,293,653
Currency translation adjustments (119,696) (98,593) (86,945)
----------- ----------- -----------
Total shareholders' equity 1,644,158 1,683,301 1,805,923
----------- ----------- -----------
$ 3,567,422 $ 3,377,698 $ 3,581,142
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for all periods have been restated retroactively for the effects of
the March 1997 merger with Tyco, accounted for as a pooling of interests. See Note 7.
3
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the For the
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
(In thousands, except per share amounts) 1997 1996 1997 1996
- - ---------------------------------------- ---------- ---------- ---------- ----------
Net Sales $ 972,656 $ 921,583 $1,666,176 $1,605,582
Cost of sales 513,819 485,559 884,528 846,684
---------- ---------- ---------- ----------
Gross Profit 458,837 436,024 781,648 758,898
Advertising and promotion expenses 131,713 129,524 234,339 229,628
Other selling and administrative expenses 192,707 183,216 377,993 352,797
Integration/restructuring costs - - 275,000 -
Interest expense 18,514 21,990 38,150 41,883
Other expense, net 7,959 8,704 15,841 13,203
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes 107,944 92,590 (159,675) 121,387
Provision (benefit) for income taxes 32,310 29,220 (30,685) 37,483
---------- ---------- ---------- ----------
Net Income (Loss) 75,634 63,370 (128,990) 83,904
Less: preferred stock dividend requirements 2,837 889 5,677 1,716
---------- ---------- ---------- ----------
Net Income (Loss) Applicable to Common Shares $ 72,797 $ 62,481 $ (134,667) $ 82,188
========== ========== ========== ==========
Primary Income (Loss) Per Common And Common
Equivalent Share
- - -------------------------------------------
Net income (loss) $ 0.25 $ 0.21 $ (0.46) $ 0.28
========== ========== ========== ==========
Average number of common and common
equivalent shares 295,716 297,916 290,069 298,345
========== ========== ========== ==========
Dividends Declared Per Common Share $ 0.070 $ 0.060 $ 0.130 $ 0.120
========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for all periods have been restated retroactively for the effects of the
March 1997 merger with Tyco, accounted for as a pooling of interests. See Note 7.
4
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
Six Months Ended
-----------------------
June 30, June 30,
(In thousands) 1997 1996
- - -------------- ---------- ----------
Cash Flows From Operating Activities:
- - -------------------------------------
Net income (loss) $ (128,990) $ 83,904
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation 88,927 67,642
Amortization 17,374 18,668
Increase (decrease) from changes in net assets and liabilities:
Accounts receivable (389,743) (259,555)
Inventories (121,058) (157,860)
Prepaid expenses and other current assets 4,812 10,255
Accounts payable, accrued liabilities and
income taxes payable (112,177) (243,111)
Deferred compensation and other retirement plans 6,583 6,147
Deferred income taxes (15,947) (9,248)
Other, net (2,066) 2,542
---------- ----------
Net cash used in operating activities (652,285) (480,616)
---------- ----------
Cash Flows From Investing Activities:
- - -------------------------------------
Purchases of tools, dies and molds (47,968) (56,433)
Purchases of other property, plant and equipment (59,032) (60,186)
Purchases of marketable securities - (8,000)
Purchase of other long-term investments (6,955) -
Proceeds from sales of other property, plant and equipment 6,552 1,399
Proceeds from sales of marketable securities - 25,315
Contingent consideration - investment in acquired business (8,625) (8,625)
Other, net (230) (352)
---------- ----------
Net cash used in investing activities (116,258) (106,882)
---------- ----------
Cash Flows From Financing Activities:
- - -------------------------------------
Short-term borrowings, net 136,527 188,199
Issuance of Medium-Term Notes 160,000 -
Payment of Medium-Term notes - (30,000)
Long-term foreign borrowings (3,492) (1,454)
Proceeds from issuance of preferred stock - 92,703
Tax benefit of employee stock options exercised 6,878 15,016
Exercise of stock options and warrants 18,795 33,709
Sale of treasury stock 71,276 -
Purchase of treasury stock (61,313) (80,489)
Dividends paid on common and preferred stock (40,905) (29,854)
Other, net (2,552) (848)
---------- ----------
Net cash provided by financing activities 285,214 186,982
Effect of Exchange Rate Changes on Cash (7,953) (1,174)
---------- ----------
Decrease in Cash (491,282) (401,690)
Cash at Beginning of Period 550,271 493,686
---------- ----------
Cash at End of Period $ 58,989 $ 91,996
========== ==========
<FN>
See accompanying notes to consolidated financial information.
Consolidated results for all periods have been restated retroactively for the effects of the
March 1997 merger with Tyco, accounted for as a pooling of interests. See Note 7.
5
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
-------------------------------------------
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments considered necessary for a
fair presentation of Mattel, Inc. and its subsidiaries ("the Company")
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 period's 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 1996 Annual Report to Shareholders, and the restated, combined
financial statements filed in the Company's Current Report on Form 8-K
dated July 30, 1997.
2. Accounts receivable are shown net of allowances for doubtful accounts of
$25.3 million (June 30, 1997), $18.2 million (June 30, 1996) and $21.0
million (December 31, 1996).
3. Inventories are comprised of the following:
June 30, June 30, Dec. 31,
(In thousands) 1997 1996 1996
- - -------------- --------- --------- ---------
Raw materials and work in progress $ 89,093 $ 97,539 $ 70,121
Finished goods 463,370 465,383 374,057
--------- --------- ---------
$ 552,463 $ 562,922 $ 444,178
========= ========= =========
4. Supplemental disclosure of cash flow information:
For the Six Months Ended
------------------------
June 30, June 30,
(In thousands) 1997 1996
- - -------------- ---------- -----------
Cash paid during the period for:
Interest $ 37,648 $ 38,581
Income taxes 37,996 34,175
Noncash investing and financing
activities:
Issuance of stock warrant - 26,444
- - --------------------------------------------------------------------
6
5. In February 1996, the Company filed a universal shelf registration
statement allowing the issuance of up to $350.0 million of debt and
equity securities. This registration statement was amended in May 1997
to allow the issuance of an additional $39.5 million of debt and equity
securities. In the first and second quarters of 1997, the Company
issued an aggregate of $160.0 million principal amount of Series B
Medium-Term Notes maturing on various dates from March 2008 to June
2011. Interest is payable semiannually at fixed rates ranging from
7.14% to 7.49% per annum on the fifteenth day of May and November. In
July 1997, the Company issued an additional $70.0 million principal
amount of Series B Medium-Term Notes maturing in July 2007 and July
2012, which bear interest at fixed rates of 6.72% and 7.25% per annum,
respectively. In addition, the Company issued 3.0 million common shares
valued at $72.8 million in March 1997.
6. On July 10, 1997, the Company issued its Notice of Redemption to holders
of the 10-1/8% Senior Subordinated Notes. The redemption price is
103.797% of the principal amount, payable in cash together with interest
accrued to August 15, 1997, the final interest payment date. The
Company expects to recognize an extraordinary loss of approximately $5
million, net of tax, as a result of the redemption.
7. Pursuant to an Agreement and Plan of Merger ("the Tyco Merger
Agreement") dated November 17, 1996, as amended by an Amendment to
Agreement and Plan of Merger dated November 22, 1996, a merger was
consummated between the Company and Tyco on March 27, 1997. The stock-
for-stock transaction was approved by the shareholders of Tyco, after
which Tyco was merged with and into Mattel, with Mattel continuing as
the surviving corporation in the merger. As a result of the merger, the
separate existence of Tyco ceased. Under the merger agreement, each
outstanding share of Tyco common stock was converted into the right to
receive 0.48876 Mattel common shares and resulted in the issuance of
approximately 17 million shares. Tyco restricted stock units and stock
options outstanding as of the merger date were exchanged for
approximately 0.6 million Mattel common shares. In addition, each share
of Tyco Series B and Series C Preferred Stock was converted into like
Mattel preferred stock. This transaction has been accounted for as a
pooling of interests, and accordingly, financial information for periods
prior to the merger reflect retroactive restatement of the companies'
combined financial position and operating results. For periods
preceding the merger, there were no intercompany transactions which
required elimination from the combined consolidated results of
operations and there were no adjustments necessary to conform the
accounting practices of the two companies.
7
Selected financial information for the combining entities included in
the consolidated statements of income are as follows:
Net Income/
(In thousands) Net Sales (Loss)
- - -------------- ----------- -----------
FOR THE THREE MONTHS ENDED
MARCH 31, 1997
Mattel (a) $ 568,528 $ 13,123
Tyco 124,992 (7,747)
Integration/restructuring charge (b) - (210,000)
----------- -----------
Combined $ 693,520 $ (204,624)
=========== ===========
FOR THE SIX MONTHS ENDED
JUNE 30, 1996
Mattel, as previously reported $ 1,363,234 $ 96,178
Tyco (c) 242,348 (12,274)
----------- -----------
Combined $ 1,605,582 $ 83,904
=========== ===========
<FN>
(a) For the three months ended March 1997, primary earnings per share
before the effects of the merger was $0.05 per share.
(b) The integration and restructuring charge of $275.0 million, after
related income tax effects, reduced earnings of the combined company by
$210.0 million.
(c) Certain amounts for Tyco net sales have been classified differently
than previously published amounts in order to conform the accounting
presentation of the two entities. The provision for income taxes has
been adjusted by $1.7 million in June 1996 to reflect the adjustment of
valuation allowances established in the historical financial statements
of Tyco, resulting in the recognition of benefits of losses incurred by
certain foreign affiliates.
The Company recognized a $275.0 million pre-tax charge against
continuing operations in March 1997 in connection with the Tyco
integration and Mattel restructuring. Of these charges, approximately
$43 million represented transaction costs, including: investment
banking, legal, accounting, and contractual termination and incentive
benefits; and approximately $82 million related to severance costs from
the elimination of approximately 2,700 positions worldwide from the
combined company. The remaining $150 million estimated for integration
and restructuring costs includes the following: i) approximately $49
million primarily for the writedown of fixed assets and lease
termination costs in connection with the consolidation of manufacturing
facilities; ii) approximately $71 million primarily for lease and
contract terminations and asset writedowns resulting from the
elimination of duplicate marketing offices, administrative functions
and distribution facilities; and iii) approximately $30 million in
charges primarily for writeoff of tooling and other costs related to
abandonment of certain product lines. Of the total pre-tax charge,
approximately $85 million represents non-cash asset writedowns. It is
anticipated that substantially all actions related to the integration
and restructuring activity will be taken within one year.
8. In the current quarter, the Board of Directors declared cash dividends
of $0.07 per common share, compared to $0.06 per common share in the
second quarter of 1996.
8
9. All share and per share data presented in these financial statements
reflect the retroactive effects of the Tyco merger.
10. Income (loss) 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, except in any period
in which the inclusion of the stock options and warrants has the effect
of decreasing the loss per share amount otherwise computed. Earnings
available to common shareholders represent reported net income (loss)
less preferred stock dividend requirements. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share, which is effective for
financial statements issued after December 15, 1997. This statement
requires entities to report "basic" and "diluted" earnings per share in
place of primary and fully diluted earnings per share. Adoption of this
statement is not expected to have a material impact on the Company's
calculation of income per share.
11. In January 1997, the SEC issued Financial Reporting Release 48,
"Disclosure of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments and Disclosure of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative
Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments". The release requires specific qualitative
disclosures regarding the Company's accounting policies for derivative
financial instruments. 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
its results of operations and cash flows. The Company does not enter
into derivatives for trading purposes. Gains and losses related to firm
commitments, which qualify for hedge accounting, are deferred and are
recognized in the results of operations, balance sheet, and statement of
cash flows as part of the underlying transaction. Contracts that do not
qualify for hedge accounting are marked to market with gains and losses
recognized in the results of operations currently. If a derivative is
terminated prior to maturity, the resultant gain or loss is recognized
at the time of maturity of the original contract as a component of other
expense, net.
9
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 INCLUDE, BUT
ARE NOT LIMITED TO, THE RESTRUCTURING CHARGE, COST SAVINGS, AND
PROFITABILITY, 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. FORWARD-LOOKING STATEMENTS CAN
BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "CONTINUE,"
"PLANS," "INTENDS," OR OTHER SIMILAR TERMINOLOGY.
Mattel, Inc. 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. Among the Company's major core brands are BARBIE fashion dolls and
doll clothing and accessories; the Company's Disney-licensed toys; FISHER-
PRICE toys and juvenile products; SESAME STREET characters; HOT WHEELS
vehicles and playsets; MATCHBOX; CABBAGE PATCH KIDS; Tyco Electric Racing
and Tyco Radio Control; the UNO and SKIP-BO card games; and the SCRABBLE
game, which the Company markets outside of the United States and Canada.
10
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 Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net sales 100% 100% 100% 100%
=========== =========== =========== ===========
Gross profit 47% 47% 47% 47%
Advertising and promotion expenses 14 14 14 14
Other selling and administrative expenses 20 20 23 22
Restructuring and integration charge - - 16 -
Other expense, net - 1 1 1
----------- ----------- ----------- -----------
Operating profit (loss) 13 12 (7) 10
Interest expense 2 2 2 3
----------- ----------- ----------- -----------
Income (loss) before income taxes 11% 10% (9)% 7%
=========== =========== =========== ===========
SECOND QUARTER
- - --------------
The strength of the Company's core brands resulted in a 6% increase in net
sales in the second quarter of 1997 over the 1996 second quarter. Sales of
BARBIE and BARBIE-related products increased 17%, HOT WHEELS increased 74%,
and MATCHBOX increased 24%. The Company's Preschool brand sales increased
5% in the second quarter of 1997 over the year-ago quarter. This increase
was led by strength in SESAME STREET and WINNIE THE POOH, partially offset
by a 17% decline in the FISHER-PRICE products.
Sales to customers within the United States grew 10% and accounted for 68%
of consolidated sales compared to 64% in the year-ago quarter. Sales to
customers outside the United States decreased 5%, including a net $18.8
million unfavorable effect from the generally stronger US dollar relative
to the year-ago quarter. At comparable foreign currency exchange rates,
sales internationally grew 1%. In the second quarter of 1997, the US
dollar continued to strengthen against many major foreign currencies.
Although the Company hedges a portion of its anticipated currency
exposures, the remaining unhedged portion could be adversely impacted by
the strengthening US dollar. Additionally, if this strengthening persists,
Mattel's results of operations could be adversely impacted by unfavorable
translation effects on foreign revenues and earnings (see the Cautionary
Statement above).
Gross profit, advertising and promotion, other selling and administrative
expenses, and interest expense as a percentage of net sales remained
virtually constant compared to the year-ago quarter.
11
SIX MONTHS
- - ----------
Net sales in the first half of 1997 increased $60.6 million or 4% over
1996, reflecting continued worldwide demand for the Company's core brands.
Worldwide core product sales increased mainly due to greater demand for
BARBIE and BARBIE-related products, which increased 14%, and HOT WHEELS
vehicles and playsets, which increased 82%. In addition, the increase in
core brand sales reflects higher sales of the Company's Preschool brands,
including SESAME STREET and WINNIE THE POOH, partially offset by a 22%
decline in FISHER-PRICE products. Sales to customers within the United
States increased 9% and accounted for 68% of consolidated sales compared to
64% in 1996. Sales to customers outside the United States decreased 6%,
including a net $34.8 million unfavorable effect from the generally
stronger US dollar relative to the year-ago period. At comparable foreign
currency exchange rates, sales internationally remained virtually flat.
Gross profit, and advertising and promotion, as a percentage of net sales,
remained virtually constant compared to the first half of 1996. Other
selling and administrative expenses increased one percentage point over the
year-ago quarter, primarily due to higher design and development costs in
support of the Company's brands, and higher depreciation expense related to
increased investment in new assets. The restructuring and integration
activity discussed below is intended to result in reduced selling and
administrative costs as a percentage of sales. Interest expense decreased
$3.7 million or 9% from 1996 levels due to lower average borrowings in
1997.
The Company recognized a $275.0 million pre-tax charge against continuing
operations in March 1997 in connection with the Tyco integration and Mattel
restructuring. After related tax effects, the net $210.0 million impacted
the 1997 year-to-date earnings by $0.72 per share. Of these charges,
approximately $43 million represented transaction costs, including:
investment banking, legal, accounting, and contractual termination and
incentive benefits; and approximately $82 million related to severance
costs from the elimination of approximately 2,700 positions worldwide from
the combined company. The remaining $150 million estimated for integration
and restructuring costs includes the following: i) approximately $49
million primarily for the writedown of fixed assets and lease termination
costs in connection with the consolidation of manufacturing facilities; ii)
approximately $71 million primarily for lease and contract terminations and
asset writedowns resulting from the elimination of duplicate marketing
offices, administrative functions and distribution facilities; and iii)
approximately $30 million in charges primarily for writeoff of tooling and
other costs related to abandonment of certain product lines. Of the total
pre-tax charge, approximately $85 million represents non-cash asset
writedowns.
The Company anticipates the integration and restructuring charge will
provide pre-tax cost savings of approximately $60 million during 1997 and
approximately $160 million or more annually beginning in 1998. These cost
savings will result primarily from reduced overhead, elimination of
duplicate marketing and administrative offices and distribution facilities,
and more efficient manufacturing and logistics operations. Available cash
reserves and cash flows 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 actions related to the integration and
restructuring activity will be taken within one year. The statement set
forth herein is forward-looking, and actual results may differ materially
(see the Cautionary Statement above).
12
FINANCIAL CONDITION
-------------------
The Company's financial position remained strong during the first half of
1997. The Company's cash position as of June 30, 1997 was $59.0 million,
compared to $92.0 million as of the second quarter 1996. Cash decreased
$491.3 million since December 31, 1996 primarily due to funding of
operating activities.
Accounts receivable increased $180.1 million over the year-ago quarter
reflecting lower sales of certain trade receivables in 1997. Since year
end, accounts receivable increased $366.9 million mainly due to seasonal
customer payment patterns. Inventory balances increased $108.3 million
since year end, primarily as a result of the Company's production in
support of future sales volume. Sundry assets increased $68.5 million, as
compared to the year-ago quarter, primarily due to an investment in group
life insurance contracts to assist in funding the Company's deferred
compensation and excess benefit plans, and issuance of a stock warrant in
connection with a licensing agreement with Disney Enterprises, Inc.
Accrued liabilities increased $207.6 million compared to the year-ago
quarter, mainly due to the accrual for the Tyco integration and Mattel
restructuring charge. Short-term borrowings decreased $98.8 million
compared to the 1996 quarter end primarily due to proceeds from the
issuance of Tyco's Series C Preferred Stock in 1996, and the issuance of
$120.0 million in Medium-Term Notes in the second quarter of the current
year. Seasonal financing needs for the next twelve months are expected to
be satisfied through internally generated cash, issuance of commercial
paper, and use of the Company's various short-term bank lines of credit.
Details of the Company's capitalization are as follows:
(In millions) June 30, 1997 June 30, 1996 Dec. 31, 1996
- - ------------- ----------------------------------------------
Medium-Term Notes $ 380.0 17% $ 220.0 9% $ 220.0 9%
Senior Subordinated Notes - - 126.5 5 126.5 5
6-7/8% Senior notes - - 99.8 4 - -
6-3/4% Senior notes 100.0 4 100.0 4 100.0 4
Convertible Subordinated
Notes 16.0 1 16.0 1 16.0 1
Other long-term debt
obligations 53.6 2 64.6 3 57.3 2
-----------------------------------------------
Total long-term debt 549.6 24 626.9 26 519.8 21
Other long-term liabilities 117.7 5 103.9 4 113.5 5
Shareholders' equity 1,644.2 71 1,683.3 70 1,805.9 74
----------------------------------------------
$2,311.5 100% $2,414.1 100% $2,439.2 100%
==============================================
13
Total long-term debt decreased as a percentage of total capitalization
compared to the year-ago quarter, primarily due to the reclassification of
the 6-7/8% Senior Notes and 10-1/8% Tyco Senior Subordinated Notes from
long-term debt to the current portion of long-term liabilities. Future
long-term capital needs are expected to be satisfied through retention of
corporate earnings and the issuance of long-term debt instruments.
Shareholders' equity decreased $161.8 million since December 31, 1996,
primarily due to the impact of the $275.0 million restructuring and
integration charge ($210.0 million net of taxes) in 1997.
ACQUISITION
-----------
In March 1997, a merger was consummated between the Company and Tyco. The
stock-for-stock transaction was approved by the shareholders of Tyco, after
which Tyco was merged with and into Mattel, with Mattel continuing as the
surviving corporation in the merger. As a result of the merger, the
separate existence of Tyco ceased. Under the Tyco Merger Agreement, each
outstanding share of Tyco common stock was converted into the right to
receive 0.48876 Mattel common shares and resulted in the issuance of
approximately 17 million shares. In addition, each share of Tyco Series B
and Series C Preferred Stock was converted into like Mattel preferred
stock. This transaction has been accounted for as a pooling of interests,
and accordingly, financial information for periods prior to the merger
reflect retroactive restatement of the companies' combined financial
position and operating results.
14
PART II -- OTHER INFORMATION
----------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders
- - -------------------------------------------------------------
The Annual Meeting of Shareholders of Mattel, Inc. was held on May 7, 1997,
for the purpose of electing directors and approving the appointment of
independent auditors. Proxies for the meeting were solicited pursuant to
Regulation 14A of the Securities Exchange Act of 1934 and there was no
solicitation in opposition to that of management. All of management's
nominees for directors as listed in the proxy statement were elected with
the number of votes cast for each nominee as follows:
Shares Voted Votes
"FOR" Withheld
------------- ----------
John W. Amerman 235,572,163 2,372,416
Jill E. Barad 235,563,035 2,372,416
Harold Brown 235,690,293 2,372,416
Tully M. Friedman 184,360,731 2,372,416
Joseph C. Gandolfo 235,580,568 2,372,416
Ronald M. Loeb 232,163,397 2,372,416
Ned Mansour 235,589,569 2,372,416
Edward N. Ney 235,696,921 2,372,416
William D. Rollnick 235,727,089 2,372,416
Christopher A. Sinclair 235,709,234 2,372,416
Bruce L. Stein 235,408,757 2,372,416
John L. Vogelstein 235,705,883 2,372,416
The proposal to appoint Price Waterhouse LLP as independent accountants for
the Company for the year ending December 31, 1997 was ratified by the
following vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
------------ ------------ ------------ ----------
232,807,798 344,633 416,661 0
A stockholder proposal regarding board inclusiveness was included in the
Proxy Statement dated March 24, 1997. This proposal was withdrawn prior to
the annual meeting. Prior to this withdrawal, the following votes had been
cast by proxy on this proposal:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
------------ ------------ ------------ ----------
43,816,980 156,030,121 4,144,294 29,577,258
15
ITEM 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) Exhibits
--------
10.0# Amended and Restated Employment Agreement dated
January 1, 1997 between the Company and Jill E. Barad
11.0 Computation of Income (Loss) 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 June 30, 1997:
Financial
Date of Report Items Reported Statements Filed
-------------- -------------- ----------------
April 17, 1997 7 Yes
April 25, 1997 5, 7 None
May 15, 1997 5 Yes
- - -----------------------
# Certain portions of this Exhibit were omitted from the copy filed
as part of the Quarterly Report on Form 10-Q. A complete copy of
this Exhibit has been filed separately, together with an application
to obtain confidential treatment with respect thereto.
16
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 August 14, 1997 By: /s/ Kevin M. Farr
--------------------- -----------------------
Kevin M. Farr
Senior Vice President
and Controller
17