EXHIBIT 13.0
Financial Information
---------------------
Mattel, Inc. and Subsidiaries
Five-Year Financial Summary 30
Management's Discussion and Analysis of Financial Condition
and Results of Operations 31
Consolidated Financial Statements 36
Notes to Consolidated Financial Statements 41
Management Report on Responsibility for Financial Reporting 54
Report of Independent Accountants 55
29
FIVE-YEAR FINANCIAL SUMMARY
---------------------------
Mattel, Inc. and Subsidiaries
For the Year Ended December 31 (a)
-----------------------------------------------------------
(In thousands, except per share and percentage information) 1997 1996 1995 1994 1993 (b)
- -----------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Net sales $4,834,616 $4,535,332 $4,369,816 $3,971,226 $3,445,934
Gross profit 2,400,000 2,219,758 2,067,740 1,881,060 1,592,471
% of net sales 50% 49% 47% 47% 46%
Operating profit (c) 790,212 636,982 616,551 525,928 383,792
% of net sales 16% 14% 14% 13% 11%
Restructuring and integration charges (d) 275,000 - 8,900 76,700 143,214
Income before income taxes, extraordinary items
and cumulative effect of changes in
accounting principles 425,082 536,756 504,668 362,157 153,306
Provision for income taxes 135,288 164,532 166,779 137,487 87,335
Income before extraordinary items and
cumulative effect of changes in
accounting principles 289,794 372,224 337,889 224,670 65,971
Extraordinary item - loss on early retirement of debt (4,610) - - - (14,681)
Cumulative effect of changes in accounting principles - - - - (4,022)
Net income 285,184 372,224 337,889 224,670 47,268
Income Per Common Share (e):
Income before extraordinary items and cumulative effect
of changes in accounting principles
Basic 0.96 1.26 1.13 0.74 0.22
Diluted 0.94 1.23 1.11 0.73 0.22
Net income
Basic 0.95 1.26 1.13 0.74 0.15
Diluted 0.93 1.23 1.11 0.73 0.15
DIVIDENDS DECLARED PER COMMON SHARE (e) 0.27 0.24 0.19 0.15 0.12
- ----------------------------------------------------------------------------------------------------------------------
As of Year End (a)
-----------------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993 (b)
- -----------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
Cash and marketable securities $ 694,947 $ 550,271 $ 511,061 $ 290,157 $ 555,617
Accounts receivable, net 1,091,416 948,940 886,344 990,346 829,098
Inventories 428,844 444,178 407,551 405,427 313,895
Total assets 3,803,791 3,581,142 3,341,370 3,150,438 2,744,799
Short-term borrowings 17,468 28,924 76,443 57,531 68,963
Long-term liabilities 808,297 633,342 721,739 606,430 580,154
Shareholders' equity 1,822,070 1,805,923 1,551,680 1,385,777 1.095,258
- ----------------------------------------------------------------------------------------------------------------------
<FN>
(a) Consolidated financial information for all periods presented has been restated retroactively for the effects
of the March 1997 merger with Tyco, accounted for as a pooling of interests.
(b) Consolidated financial information for 1993 has been restated retroactively for the effects of the November
1993 merger with Fisher-Price, accounted for as a pooling of interests.
(c) Represents income from operations before restructuring and integration charges, interest expense and provision
for income taxes.
(d) In 1997, amount represents a nonrecurring charge for transaction, integration and restructuring costs related
to the merger with Tyco. In 1995, the nonrecurring charge represents a restructuring program to reduce
operating expenses at certain of Tyco's business units. 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 March 1996, and
January 1995 and 1994, and the mergers with Tyco and Fisher-Price in 1997 and 1993, respectively.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
----------------------------------
Mattel, Inc. and Subsidiaries
THE FOLLOWING CAUTIONARY STATEMENT IS INCLUDED IN THIS ANNUAL 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.
This analysis should be read in conjunction with the consolidated financial
statements which begin on page 36.
The Company plans to continue to focus on core brands that have
fundamental play patterns and worldwide appeal, are sustainable, and have
delivered consistent profitability and stable growth. The Company's core
brands can be grouped in the following five categories: Fashion Dolls
(BARBIE dolls and accessories); Infant and Preschool (FISHER-PRICE, Disney
Preschool and Plush, POWER WHEELS, SESAME STREET, SEE `N SAY, MAGNA DOODLE
and VIEW-MASTER); Entertainment (Disney, Nickelodeon, games and puzzles);
Wheels (HOT WHEELS, MATCHBOX, Tyco Electric Racing and Tyco Radio Control
vehicles); and Large and Small Dolls (CABBAGE PATCH KIDS, POLLY POCKET and
Tyco large dolls).
RESULTS OF OPERATIONS
- ---------------------
The following is a percentage analysis of operating results for the past
three years:
For the Year
----------------------------------
1997 1996 1995
- ---------------------------------- ---------- ---------- ----------
Net sales 100% 100% 100%
========== ========== ==========
Gross profit 50% 49% 47%
Advertising and promotion expenses 16 17 17
Other selling and administrative
expenses 16 17 16
Restructuring and integration
charges 6 - -
Other expense, net 1 1 -
---------- ---------- ----------
Operating profit 11 14 14
Interest expense 2 2 2
---------- ---------- ----------
Income before income taxes and
extraordinary item 9% 12% 12%
========== ========== ==========
1997 Compared to 1996
- ---------------------
Mattel's financial performance reflects the Company's growth in 1997,
demonstrating continued strength in its core brands, as well as cost
savings realized from the Tyco integration and Mattel restructuring. The
Company's long-term business strategies, which focus on the growth of core
brands, have resulted in another record year for sales and earnings. Net
income was $499.5 million or $1.68 per basic share ($1.65 per diluted
share), before a $4.6 million after-tax ($0.01 per basic and diluted share)
impact from an extraordinary loss due to the early retirement of debt, and
a $210 million after-tax ($0.72 per basic share and $0.71 per diluted
share) charge related to the Tyco integration and Mattel restructuring.
Gross profit as a percentage of net sales increased one percentage point to
50% as compared to the prior year.
31
The strength of the Company's core brands resulted in an increase in
net sales of $299.3 million or 7% over 1996, including a net $138.5 million
unfavorable effect from the generally stronger US dollar relative to last
year. Sales of BARBIE and BARBIE-related products, including the multi-
media products, increased 9% primarily due to the strength in dolls and
fashions, especially in the United States. Sales of the Company's Infant
and Preschool brands increased 15%, led by the strength in SESAME STREET
and Disney's WINNIE THE POOH, partially offset by a 15% decline in FISHER-
PRICE products. The Wheels category increased 21%, led by a 67% increase
in HOT WHEELS.
Sales to customers within the United States grew 14% and accounted for
66% of consolidated gross sales in 1997 compared to 62% in the prior year.
Sales to customers outside the United States decreased 5%, including the
unfavorable effect of the generally stronger US dollar relative to last
year. At comparable foreign exchange rates, sales internationally grew 3%.
Gross profit as a percentage of net sales increased one percentage
point to 50%, principally due to improved product mix. Advertising and
promotion expenses decreased one percent as a percentage of net sales
primarily due to cost savings realized from the Tyco merger. As a
percentage of net sales, other selling and administrative expenses
decreased one percentage point to 16%. This decline reflects the impact of
the Company's effort to control costs and direct cost savings realized from
the Tyco integration and Mattel restructuring.
1996 Compared to 1995
- ---------------------
Net sales increased $165.5 million or 4% over 1995, reflecting the
continuing strong demand for the Company's core products. Sales of BARBIE
and BARBIE-related products increased 20% primarily due to the strength in
dolls and fashions, especially in the United States. Sales of HOT WHEELS
vehicles and playsets increased by 19% and sales of Disney-licensed
products increased 8%. These increases were partially offset by a 4%
decline in FISHER-PRICE products. This decline primarily reflects both
late shipments of new FISHER-PRICE products and a reduction in the number
of new basic toy introductions during the year. Sales of Tyco products,
including SESAME STREET, MATCHBOX, Tyco Electric Racing and Tyco Radio
Control increased 3% from 1995.
Sales to customers within the United States grew 7% compared to 1995.
Sales to customers outside the United States increased 1%, including an
unfavorable effect of approximately $30 million due to the generally
stronger US dollar relative to 1995. At comparable foreign exchange rates,
sales internationally grew 3%.
Gross profit as a percentage of net sales increased two percentage
points to 49%, principally due to lower resin and other commodity prices
and improved product mix. Advertising and promotion expenses remained
virtually constant as a percentage of net sales; however, spending
increased $47.2 million primarily in support of increased sales volume, new
product introductions, and further development of international markets.
As a percentage of net sales, other selling and administrative expenses
increased one percentage point to 17%. This growth reflects higher design
and development expenses related to new products, increased sales and
marketing expenditures to support the development of the Company's brands,
and higher depreciation expense related to increased investment in fixed
assets. Other expense, net, increased $33.4 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.
INCOME TAXES
- ------------
The effective income tax rates for 1997 and 1996 were approximately 32% and
31%, respectively.
FINANCIAL POSITION
- ------------------
The Company's financial position remained strong in 1997 primarily due to
its profitable operating results. At December 31, 1997, the Company's cash
position was $694.9 million, compared to $550.3 million as of the prior
year. Accounts receivable increased $142.5 million, reflecting higher
sales volume in 1997. Intangibles decreased $68.7 million compared to the
prior year, due to the disposal of certain intangibles resulting from the
sale of the Company's sports product lines and amortization.
Accrued liabilities increased $118.8 million compared to last year,
mainly due to the accrual for the Tyco integration and Mattel restructuring
charge. Current portion of long-term liabilities decreased $92.9 million
primarily due to the repayment of the $100.0 million 6-7/8% Senior Notes
which matured on August 1, 1997.
The Company's capitalization is as follows:
As of Year End
----------------------------------------
(In millions) 1997 1996
- ------------------------------ ------------------- -------------------
Medium-Term Notes $ 520.5 20% $ 220.0 9%
6-3/4% Senior Notes 100.0 4 100.0 4
10-1/8% Notes - - 126.5 5
Convertible Subordinated Notes - - 16.0 1
Other long-term debt
obligations 55.0 2 57.4 2
--------- -------- -------- ---------
Total long-term debt 675.5 26 519.9 21
Other long-term liabilities 132.8 5 113.5 5
Shareholders' equity 1,822.1 69 1,805.9 74
--------- -------- -------- ---------
$2,630.4 100% $2,439.3 100%
========= ======== ======== =========
32
Total long-term debt increased $155.6 million mainly due to the
issuance of $310.0 million of Medium-Term Notes, partially offset by the
redemption of the 10-1/8% Notes, and conversion of the Convertible
Subordinated Notes into 892.7 thousand shares of Mattel common stock.
Future long-term capital needs are expected to be satisfied through the
retention of corporate earnings and the issuance of long-term debt
instruments. 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, which could include Medium-Term Notes. This
registration statement was amended in May 1997 to allow the issuance of an
additional $39.5 million of debt and equity securities. In October 1997,
the Company filed a universal shelf registration statement allowing the
issuance of up to $350.0 million of debt and equity securities, which could
include Medium-Term Notes. As of December 31, 1997, $356.7 million of debt
and equity securities was available to be issued. Shareholders' equity
increased $16.1 million over 1996, reflecting profitable operating results
for the current year, activity related to employee stock compensation
plans, and the sale of 3.0 million shares of treasury stock in a registered
public offering. These increases were partially offset by treasury stock
purchases, dividend declarations on common and preferred stock, and
unfavorable currency translation adjustments. On December 2, 1997, all
outstanding shares of Series B Preferred Stock were converted by the
holders into 2.8 million shares of Mattel common stock.
LIQUIDITY
- ---------
The primary sources of liquidity for the Company over the last three years
have been cash on hand at the beginning of the year, cash flows generated
from operations, long-term debt issuances and short-term seasonal
borrowings. Operating activities generated cash flows of $481.9 million
during 1997, compared to $524.8 million and $446.6 million in 1996 and
1995, respectively.
Principal investing activities during the last three years included
additions of tooling, property and equipment, and construction of new
manufacturing and office facilities.
Financing activities provided intermediate- and long-term funds
through the issuance of Medium-Term Notes in 1997 and 1995, which were
utilized by the Company to retire higher-cost debt and for general
corporate purposes. In 1997, the Company redeemed the 10-1/8% Notes and
repaid the 6-7/8% Senior Notes upon maturity. In 1996, Tyco issued 772.8
thousand shares of Series C Preferred Stock for net proceeds of $92.7
million. In 1995, all shares of Series F Preference Stock and common stock
were repurchased from the IGI Employee Stock Ownership Plan ("ESOP"). Cash
outlays for treasury stock were made over the three-year period and provide
shares for issuance under the Company's employee stock option plans and the
exercise of outstanding warrants. The Company has consistently increased
cash payments for common dividends over the three-year period.
SHORT-TERM FINANCING
- --------------------
The Company's seasonal working capital requirements for the coming year are
expected to be financed through existing and 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. Under the Company's
domestic credit line, unsecured facilities provide a total of $1.0 billion
in seasonal financing from a commercial bank group. The facilities provide
for up to $700.0 million in advances and backup for commercial paper
issuances (a five-year facility), and up to an additional $300.0 million (a
five-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 and interest coverage.
In addition, the Company expects to have available approximately $275
million of individual short-term international credit lines with a number
of banks, which customarily are extended as needed to finance seasonal
working capital requirements of certain international affiliates.
MERGER
- ------
Pursuant to an Agreement and Plan of Merger 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.
33
RESTRUCTURING CHARGES
- ---------------------
In connection with the Tyco merger, the Company commenced an integration
and restructuring plan and recorded a $275 million pre-tax charge against
operations in March 1997. The plan consisted of consolidating certain
manufacturing and distribution operations, eliminating duplicative
marketing and administrative offices, terminating various distributor and
licensing arrangements and abandoning certain product lines. Included in
the charge was approximately $86 million for estimated severance costs
related to the elimination of 2,700 positions principally associated with
facilities to be closed. The remainder of the charge consisted of
transaction costs related to the merger, asset write-downs and contract
termination expenses. Of the total pre-tax charge, approximately $90
million represents non-cash asset write-downs. Through December 31, 1997,
the total integration and restructuring expenditures and write-offs were
approximately $166 million, $46 million of which related to severance
payments. The remaining accrual of $109 million is considered sufficient
to cover future costs of the plan which is expected to be substantially
completed in 1998.
Pre-tax cost-savings resulting from the restructuring for the twelve
months ended December 31, 1997 were approximately $60 million. Management
continues to believe that the integration and restructuring charge will
provide pre-tax cost savings of 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 restructuring, with no adverse
impact expected on the Company's future liquidity, revenues or financial
position. The statements set forth herein are forward-looking, and actual
results may differ materially (see the Cautionary Statement above).
LITIGATION
- ----------
The Company is involved in various litigation and other legal matters,
including claims related to intellectual property, product liability, labor
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, 1997, the Company had outstanding commitments for
1998 purchases of inventory of approximately $90 million. Licensing and
similar agreements with terms extending through the year 2002 contain
provisions for future guaranteed minimum payments aggregating approximately
$360 million. In addition, under a certain licensing agreement, the
Company may have additional commitments as high as $37.8 million in 1999
payable over three years.
FOREIGN CURRENCY RISK
- ---------------------
The Company enters into foreign currency forward exchange and option
contracts primarily as hedges of inventory purchases, sales and other
intercompany transactions denominated in foreign currencies, to limit the
effect of exchange rate fluctuations on the results of operations and cash
flows.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot
be predicted with certainty. The Company's primary market risk exposures
are in Europe and Asia. The Company seeks to mitigate its exposure to
market risk by monitoring its currency exchange exposure for the year and
partially or fully hedging such exposure. In addition, the Company manages
its exposure through the selection of currencies used for international
borrowings and intercompany invoicing. The Company does not trade in
financial instruments for speculative purposes.
The following tables provide information about the Company's
derivative financial instruments as of December 31, 1997, that are intended
to hedge firm foreign currency commitments. These contracts generally have
maturity dates of up to 18 months on the date of execution and mature
within 13 months of December 31, 1997.
34
Foreign Currency Forward Exchange Contracts
- -------------------------------------------
Buy Sell
--------------------------------- ---------------------------------
Weighted Weighted
Notional Average Notional Average
(In thousands of US Contract Contract Fair Contract Contract Fair
dollars) Amount (a) Rate Value (b) Amount (a) Rate Value (b)
- ----------------------------------------------------------------------------------------------
German marks $ 19,179 1.78 $ 18,972 $ 65,119 1.77 $ 64,941
Italian lira 38,277 1,800.00 39,203 53,161 1,749.00 52,585
Malaysian ringgits 53,304 3.08 41,551 - - -
Hong Kong dollars 148,084 8.04 149,108 2,527 7.76 2,532
French francs - - - 38,166 5.86 37,639
British pounds sterling 32,548 0.61 32,751 72,580 0.63 73,570
Canadian dollars 22,608 1.42 22,474 - - -
Spanish pesetas - - - 13,858 148.99 13,668
Dutch guilders 12,778 2.00 12,666 36,285 1.96 35,719
Japanese yen - - - 7,956 125.73 7,659
Australian dollars 6,398 1.54 6,391 - - -
Belgian francs - - - 55,126 36.48 54,515
Swiss francs 13,677 1.44 13,454 - - -
Indonesian rupiah 15,230 3,930.78 9,891 - - -
Singapore dollar - - - 4,107 1.72 4,203
Mexican peso - - - 4,200 8.05 4,138
---------- --------- ---------- ---------
$362,083 $346,461 $353,085 $351,169
========== ========= ========== =========
<FN>
(a) All contracts are against the US dollar and are maintained by reporting
units with a US dollar functional currency, with the exception of the
Indonesian rupiah contracts that are maintained by an entity with a
rupiah functional currency.
(b) For the purchase of foreign currencies, 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 1997. For the sale of foreign currencies,
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 1997.
The differences between the fair value and the notional contract amounts
are expected to be fully offset by foreign currency exchange gains and
losses on the underlying hedged transactions.
Foreign Currency Option Contracts
- ---------------------------------
Sell
----------------------------------------------
Weighted
Notional Average
(In thousands of US Contract Contract Value of Fair
dollars) Amount Rate Option Value (a)
- ----------------------------------------------------------------------
German marks $ 8,858 1.71 $ 454 $ 8,404
French francs 14,590 5.68 801 13,789
Spanish pesetas 5,505 144.00 287 5,218
Dutch guilders 13,682 1.91 769 12,913
Belgian francs 4,912 35.00 281 4,631
Mexican peso 46,000 8.35 455 45,545
-------- -------- ---------
$93,547 $3,047 $90,500
======== ======== =========
<FN>
(a) Fair value reflects the notional amount of US dollars the Company
would receive from the current contracts, less the December 31, 1997
option value. The option value is determined based on dealer quotes
for contracts involving the same currencies and maturity dates.
CERTAIN CONSIDERATIONS
- ----------------------
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.
During 1997, the US dollar strengthened significantly against many
major foreign currencies. Although the Company hedges a portion of its
anticipated currency exposures, the unhedged portion can be impacted by
exchange rate movements. Additionally, Mattel's results of operations can
be impacted by translation effects on foreign revenues and earnings.
The Company owns and operates manufacturing facilities and utilizes
third-party manufacturers throughout Asia, primarily in China, Indonesia
and Malaysia. There is a risk of political instability and civil unrest in
these countries, which could temporarily or permanently damage the
Company's manufacturing operations located there. Any significant
disruption of the Company's manufacturing operations or its suppliers would
negatively impact the Company's business, financial condition and results
of operations.
The Company has reviewed its computer systems and developed a plan to
achieve proper processing of transactions in the year 2000 and beyond.
Management believes that all of Mattel's computer systems will be year 2000
compliant by the end of first quarter 1999. Costs incurred to date to
implement the plan have not been material and are not expected to be
material to operating results in the future. However, there can be no
assurance that the systems of other companies on which Mattel's systems
rely will also be timely converted or that any such failure to convert by
another company would not have an adverse effect on Mattel's systems. Any
significant disruption of the Company's ability to communicate
electronically with its business partners could negatively impact the
Company's business, financial condition and results of operations. The
statements set forth herein and in the preceding paragraphs are forward-
looking, and actual results may differ materially (see the Cautionary
Statement above).
35
CONSOLIDATED BALANCE SHEETS
---------------------------
Mattel, Inc. and Subsidiaries
December 31, December 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 694,947 $ 550,271
Accounts receivable, less allowances of
$30.7 million at December 31, 1997 and
$21.0 million at December 31, 1996 1,091,416 948,940
Inventories 428,844 444,178
Prepaid expenses and other current assets 246,529 195,673
---------- ----------
Total current assets 2,461,736 2,139,062
---------- ----------
Property, Plant and Equipment
Land 29,556 30,864
Buildings 198,396 216,523
Machinery and equipment 453,978 438,969
Capitalized leases 24,625 26,512
Leasehold improvements 68,179 69,732
---------- ----------
774,734 782,600
Less: accumulated depreciation 336,946 323,096
---------- ----------
437,788 459,504
Tools, dies and molds, net 163,809 156,777
---------- ----------
Property, plant and equipment, net 601,597 616,281
---------- ----------
Other Noncurrent Assets
Intangible assets, net 542,759 611,410
Sundry assets 197,699 214,389
---------- ----------
$3,803,791 $3,581,142
========== ==========
<FN>
The accompanying notes are an integral part of these statements.
Consolidated results for December 31, 1996 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.
36
December 31, December 31,
(In thousands, except share data) 1997 1996
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 17,468 $ 28,924
Current portion of long-term liabilities 13,659 106,596
Accounts payable 310,117 312,378
Accrued liabilities 629,445 510,691
Income taxes payable 202,735 183,288
---------- ----------
Total current liabilities 1,173,424 1,141,877
---------- ----------
Long-Term Liabilities
6-3/4% Senior Notes 100,000 100,000
10-1/8% Senior Subordinated Notes - 126,500
Medium-Term Notes 520,500 220,000
Mortgage notes 43,573 47,600
Other 144,224 139,242
---------- ----------
Total long-term liabilities 808,297 633,342
---------- ----------
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 in 1996 - 54
Preferred stock, Series C $1.00 par value,
$125.00 liquidation preference per share,
772.8 thousand shares authorized; 771.9
thousand and 772.8 thousand shares issued
and outstanding in 1997 and 1996,
respectively 772 773
Common stock $1.00 par value, 600.0 million
shares authorized; 300.4 million and
296.1 million shares issued in 1997 and
1996, respectively 300,381 296,091
Additional paid-in capital 509,172 518,296
Treasury stock at cost; 8.8 million and
8.1 million shares in 1997 and 1996, (285,420) (215,999)
respectively
Retained earnings 1,490,804 1,293,653
Currency translation and other adjustments (193,639) (86,945)
---------- ----------
Total shareholders' equity 1,822,070 1,805,923
---------- ----------
$3,803,791 $3,581,142
========== ==========
<FN>
Commitments and Contingencies (See accompanying notes.)
37
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Mattel, Inc. and Subsidiaries
For the Year
----------------------------------
(In thousands, except per share amounts) 1997 1996 1995
- ---------------------------------------------------------------------------------
NET SALES $4,834,616 $4,535,332 $4,369,816
Cost of sales 2,434,616 2,315,574 2,302,076
---------- ---------- ----------
GROSS PROFIT 2,400,000 2,219,758 2,067,740
Advertising and promotion expenses 779,139 778,919 731,746
Other selling and administrative expenses 796,952 772,335 721,362
Restructuring and integration charges 275,000 - 8,900
Interest expense 90,130 100,226 102,983
Other expense (income), net 33,697 31,522 (1,919)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 425,082 536,756 504,668
Provision for income taxes 135,288 164,532 166,779
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 289,794 372,224 337,889
Extraordinary item - loss on early
retirement of debt (4,610) - -
---------- ---------- ----------
NET INCOME 285,184 372,224 337,889
Preferred and preference stock
dividend requirements 10,505 7,391 6,542
---------- ---------- ----------
NET INCOME APPLICABLE TO COMMON SHARES $ 274,679 $ 364,833 $ 331,347
========== ========== ==========
BASIC INCOME PER COMMON SHARE
Income before extraordinary item $ 0.96 $ 1.26 $ 1.13
Extraordinary item - loss on early
retirement of debt (0.01) - -
---------- ---------- ----------
Net income $ 0.95 $ 1.26 $ 1.13
========== ========== ==========
Average number of common shares 295,450 290,393 293,312
========== ========== ==========
DILUTED INCOME PER COMMON SHARE
Income before extraordinary item $ 0.94 $ 1.23 $ 1.11
Extraordinary item - loss on early
retirement of debt (0.01) - -
---------- ---------- ----------
Net income $ 0.93 $ 1.23 $ 1.11
========== ========== ==========
Average number of common and common
equivalent shares 295,653 303,057 298,763
========== ========== ==========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.27 $ 0.24 $ 0.19
========== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
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.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Mattel, Inc. and Subsidiaries
For the Year
---------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 285,184 $ 372,224 $ 337,889
Adjustments to reconcile net income to
net cash flows from operating activities:
Noncash restructuring and integration charges 90,382 - -
Loss on early retirement of debt, net of tax 4,610 - -
Gain on sale of business - - (9,142)
Depreciation 154,994 144,672 133,029
Amortization 34,917 36,671 36,976
Increase (decrease) from changes in assets
and liabilities:
Accounts receivable (201,909) (71,348) 94,540
Inventories (33,012) (38,304) (5,204)
Prepaid expenses and other current assets (75,810) 15,310 10,090
Accounts payable, accrued liabilities and
income taxes payable 161,640 58,072 (144,995)
Deferred compensation and other retirement
plans 369 9,110 12,437
Deferred income taxes 64,015 (2,147) (17,235)
Other, net (3,526) 551 (1,786)
--------- --------- ---------
Net cash flows from operating activities 481,854 524,811 446,599
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tools, dies and molds (96,006) (108,641) (103,257)
Purchases of other property, plant and equipment (125,567) (122,498) (119,587)
Purchase of other long-term investments (7,816) (25,114) -
Proceeds from sale of business and other
property, plant and equipment 31,484 6,250 33,037
Net proceeds from sales of marketable securities - 17,315 3,083
Contingent consideration (8,625) (8,625) (8,625)
Other, net 566 317 (826)
--------- --------- ---------
Net cash flows used for investing activities (205,964) (240,996) (196,175)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (6,957) (45,652) 2,558
Issuance of Medium-Term Notes 310,000 - 139,500
Payment of 10-1/8% Senior Subordinated Notes (131,300) - -
Payment of 6-7/8% Senior Notes (100,000) - -
Payment of Medium-Term Notes - (30,000) -
Long-term foreign borrowings (3,523) (3,717) (2,572)
Tax benefit of employee stock options exercised 17,900 26,300 8,500
Exercise of stock options and warrants 41,777 73,314 24,601
Sale of treasury stock 71,248 - -
Purchase of treasury stock (227,932) (269,771) (64,284)
Repurchase of Series F Preference Stock - - (73,866)
Proceeds from issuance of preferred stock - 92,702 -
Dividends paid on common, preferred and
preference stock (84,537) (66,473) (50,963)
Payment of debt issuance costs (2,145) (832) (6,582)
Other, net (759) (2,295) (1,041)
--------- --------- ---------
Net cash flows used for financing activities (116,228) (226,424) (24,149)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (14,986) (806) (2,165)
--------- --------- ---------
INCREASE IN CASH 144,676 56,585 224,110
CASH AT BEGINNING OF YEAR 550,271 493,686 269,576
--------- --------- ---------
CASH AT END OF YEAR $ 694,947 $ 550,271 $ 493,686
========= ========= =========
<FN>
The accompanying notes are an integral part of these statements.
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.
39
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
Mattel, Inc. and Subsidiaries
Additional
Preferred Preference Common Paid-In
(In thousands) Stock Stock Stock Capital
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $49 $ 9 $240,233 $559,867
Net income
Five-for-four stock split 55,794 (55,794)
Purchase of treasury stock
Repurchase of Series F Preference Stock (9) (73,857)
Restricted stock activity 20 8,237
Exercise of stock options 33 8,715
Issuance of treasury stock (18,169)
Dividends declared on common stock
Dividends declared on preferred and
preference stock 3 3,151
Currency translation and other adjustments
--------- --------- -------- --------
BALANCE, DECEMBER 31, 1995 52 - 296,080 432,150
Net income
Purchase of treasury stock
Restricted stock activity 2,770
Exercise of stock options 11 26,414
Issuance of treasury stock (53,554)
Issuance of stock warrant 26,444
Issuance of preferred stock 773 91,929
Exercise of stock subscription warrants (9,507)
Dividends declared on common stock
Dividends declared on preferred stock 2 1,650
Currency translation and other adjustments
--------- --------- -------- --------
BALANCE, DECEMBER 31, 1996 827 - 296,091 518,296
Net income
Purchase of treasury stock
Issuance of treasury stock (45,486)
Exercise of stock options 636 23,927
Conversion of 7% Notes 893 15,141
Conversion of preferred stock (55) 2,761 (2,706)
Dividends declared on common stock
Dividends declared on preferred stock
Currency translation adjustments
--------- --------- -------- --------
BALANCE, DECEMBER 31, 1997 $772 $ - $300,381 $509,172
========= ========= ======== ========
<FN>
The accompanying notes are an integral part of these statements.
Consolidated results for December 31, 1994, 1995 and 1996 have been restated retroactively
for the effects of the March 1997 merger with Tyco, accounted for as a pooling of interests.
See Note 7.
Currency
Translation Total
Treasury Retained and Other Shareholders'
(In thousands) Stock Earnings Adjustments Equity
- ------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $ (53,812) $ 713,551 $ (74,120) $1,385,777
Net income 337,889 337,889
Five-for-four stock split -
Purchase of treasury stock (64,284) (64,284)
Repurchase of Series F Preference Stock (73,866)
Restricted stock activity 8,257
Exercise of stock options 8,748
Issuance of treasury stock 42,522 24,353
Dividends declared on common stock (50,253) (50,253)
Dividends declared on preferred and
preference stock (6,542) (3,388)
Currency translation and other adjustments (21,553) (21,553)
--------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 (75,574) 994,645 (95,673) 1,551,680
Net income 372,224 372,224
Purchase of treasury stock (269,771) (269,771)
Restricted stock activity (6,627) (3,857)
Exercise of stock options 26,425
Issuance of treasury stock 124,315 70,761
Issuance of stock warrant 26,444
Issuance of preferred stock 92,702
Issuance of stock subscription warrants 11,658 2,151
Dividends declared on common stock (65,825) (65,825)
Dividends declared on preferred stock (7,391) (5,739)
Currency translation and other adjustments 8,728 8,728
--------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 (215,999) 1,293,653 (86,945) 1,805,923
Net income 285,184 285,184
Purchase of treasury stock (227,932) (227,932)
Issuance of treasury stock 158,511 113,025
Exercise of stock options 24,563
Conversion of 7% Notes 16,034
Conversion of preferred stock -
Dividends declared on common stock (77,528) (77,528)
Dividends declared on preferred stock (10,505) (10,505)
Currency translation adjustments (106,694) (106,694)
--------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 $(285,420) $1,490,804 $(193,639) $1,822,070
========= ========== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
Consolidated results for December 31, 1994, 1995 and 1996 have been restated retroactively
for the effects of the March 1997 merger with Tyco, accounted for as a pooling of interests.
See Note 7.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Mattel, Inc. and Subsidiaries
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Preparation
- ----------------------------------------------------
The consolidated financial statements include the accounts of Mattel, Inc.
and its subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation, and
certain amounts in the financial statements for prior years have been
reclassified to conform with the current year presentation. Investments in
joint ventures and other companies are accounted for by the equity method
or cost basis depending upon the level of the investment and/or the
Company's ability to exercise influence over operating and financial
policies. Financial data for all periods presented reflect the retroactive
effect of the merger, accounted for as a pooling of interests, with Tyco
Toys, Inc. ("Tyco") consummated in March 1997 (see Note 7).
Preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of foreign subsidiaries are translated into US
dollars at fiscal year-end exchange rates. Income, expense and cash flow
items are translated at weighted average exchange rates prevailing during
the fiscal year. The resulting currency translation adjustments are
recorded as a component of shareholders' equity.
Cash
- ----
Cash includes cash equivalents, which are highly liquid investments with
maturities of three months or less when purchased. Because of the short
maturities of these instruments, the carrying amount is a reasonable
estimate of fair value.
Inventories
- -----------
Inventories, net of an allowance for excess quantities and obsolescence,
are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over estimated useful lives of 10 to 50 years for
buildings, 18 months 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 18 months
to 3 years.
Intangibles and Long-Lived Assets
- ---------------------------------
Intangible assets consist of the excess of purchase price over the fair
value of net assets acquired in purchase acquisitions, and the costs of
acquired patents and trademarks. Intangible assets are amortized using the
straight-line method over periods ranging from 18 months to 40 years.
Accumulated amortization was $186.1 million and $165.5 million as of
December 31, 1997 and 1996, respectively.
The Company periodically reviews the carrying value of its fixed and
intangible assets to identify and assess any impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
assets.
Revenue Recognition
- -------------------
Net sales are recognized when products are shipped. Accruals for customer
discounts and rebates, and defective returns are recorded as the related
revenues are recognized.
Advertising Costs
- -----------------
Costs incurred in producing media advertising are expensed the first time
the advertising takes place. Advertising costs associated with customer
benefit programs are accrued as the related revenues are recognized.
Stock-Based Compensation
- ------------------------
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). Accordingly, no compensation cost has been
recognized in the results of operations for nonqualified stock options
granted under the Company's plans as such options are granted at not less
than the quoted market price of the Company's common stock on the date of
grant.
Income Taxes
- ------------
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities, applying enacted
statutory tax rates in effect for the year in which the differences are
expected to reverse.
Income and Dividends Per Common Share
- -------------------------------------
All share and per share data presented in these financial statements
reflect the retroactive effects of the March 1997 Tyco merger and the five-
for-four stock split distributed in March 1996.
In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings per Share. Accordingly,
all periods have been restated to present basic and diluted income per
common share.
41
Basic income per common share is computed by dividing earnings
available to common shareholders by the average number of common shares
outstanding during each period. Earnings available to common shareholders
represent reported net income less preferred and preference stock dividend
requirements, as applicable.
Diluted income per common share is computed by dividing diluted
earnings available to common shareholders by the weighted 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, net of assumed treasury share repurchases at average
market prices, and conversion of dilutive preferred and preference stock
and convertible debt. Diluted earnings available to common shareholders
represent earnings available to common shareholders plus preferred and
preference stock dividend requirements and interest savings resulting from
the assumed conversions of dilutive securities.
A reconciliation of earnings available to common shareholders and
diluted earnings available to common shareholders and the related weighted
average shares for the years ended December 31 follows (in thousands):
1997 1996 1995
---------------------------------------------------------------
Earnings Shares Earnings Shares Earnings Shares
- --------------------------------------------------------------------------------------------
Income before
extraordinary item $289,794 $372,224 $337,889
Extraordinary item -
loss on early
retirement of debt (4,610)
-------- ------- --------
Net income 285,184 372,224 337,889
Less: preferred and
preference stock
dividend requirements (10,505) (7,391) (6,542)
-------- ------- --------
Earnings available to
common shareholders $274,679 290,450 $364,833 290,393 $331,347 293,312
Dilutive securities
Dilutive stock options 3,975 4,087 3,779
Stock subscription
warrants 639 927 928
7% Notes 479 589 728 783 692 744
Preferred and preference
stock dividend
requirements 7,391 6,867
-------- ------- -------- ------- -------- -------
Diluted earnings available
to common shareholders $275,158 295,653 $372,952 303,057 $332,039 298,763
======== ======= ======== ======= ======== =======
Preferred and preference stock, as applicable, were excluded from the
calculation of diluted earnings per share in 1997 and 1995 because they
were anti-dilutive. A warrant issued in 1996 to purchase 3.0 million
shares of the Company's common stock was excluded from the calculation of
diluted earnings per share because it was anti-dilutive in 1996 and 1997.
Foreign Currency Contracts
- --------------------------
The Company enters into foreign currency forward exchange and option
contracts primarily as hedges of inventory purchases, sales and other
intercompany transactions denominated in foreign currencies to limit the
effect of exchange rate fluctuations on its results of operations and cash
flows. The Company does not enter into contracts for speculative purposes.
Gains and losses related to firm commitments, which qualify for hedge
accounting, are deferred and are recognized in the results of operations,
balance sheet, and statement of cash flows as part of the underlying
transaction. Contracts that do not qualify for hedge accounting are marked
to market with gains and losses recognized in the results of operations
currently. If a derivative previously designated as a hedge of a foreign
currency commitment is terminated prior to the transaction date of the
related commitment, the resultant gain or loss is recognized at the time of
maturity of the original contract as a component of other expense, net.
NOTE 2 - INCOME TAXES
- ---------------------
Consolidated pre-tax income consists of the following (in thousands):
For the Year
----------------------------------
1997 1996 1995
---------- ---------- ----------
US operations $ 70,225 $206,668 $277,884
Foreign operations 354,857 330,088 226,784
---------- ---------- ----------
$425,082 $536,756 $504,668
========== ========== ==========
The provision for current and deferred income taxes consists of the
following (in thousands):
For the Year
----------------------------------
1997 1996 1995
---------- ---------- ----------
Current
Federal $ 55,056 $ 89,781 $ 84,800
State 15,745 13,200 14,900
Foreign 80,395 64,165 52,595
--------- --------- ---------
151,196 167,146 152,295
--------- --------- ---------
Deferred
Federal (14,283) 549 16,506
State 3,640 1,000 300
Foreign (7,962) (4,163) (2,322)
--------- --------- ---------
(18,605) (2,614) 14,484
--------- --------- ---------
Provision including extraordinary
item 132,591 164,532 166,779
Benefit allocated to extraordinary
item 2,697 - -
--------- --------- ---------
Total provision for income taxes $135,288 $164,532 $166,779
========= ========= =========
Deferred income taxes are provided principally for net operating loss
carryforwards, 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
42
deferred income tax assets (liabilities) were comprised of the following
(in thousands):
As of Year End
---------------------------
1997 1996
------------ ------------
Operating loss and tax credit carryovers $102,713 $ 91,899
Sales allowances and inventory reserves 71,990 75,887
Deferred compensation 27,680 26,360
Excess of tax basis over book basis 15,545 14,082
Postretirement benefits 12,645 12,765
Restructuring and integration charges 36,446 2,338
Other 20,651 37,773
------------ ------------
Gross deferred income tax assets 287,670 261,104
------------ ------------
Excess of book basis over tax basis (13,453) (13,038)
Retirement benefits (12,752) (10,281)
Other (10,816) (13,215)
------------ ------------
Gross deferred income tax liabilities (37,021) (36,534)
Deferred income tax asset valuation
allowances (64,077) (56,603)
------------ ------------
Net deferred income tax assets $186,572 $167,967
============ ============
Management considered all available evidence and determined that a
valuation allowance of $64.1 million was required as of December 31, 1997
for certain tax credit and net operating loss carryforwards which would
likely expire prior to their utilization. However, management feels it is
more likely than not that the Company will generate sufficient taxable
income in the appropriate carryforward periods to realize the benefit of
the remaining net deferred tax assets of $186.6 million.
Differences between the provision for income taxes 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
----------------------------------
1997 1996 1995
---------- ---------- ----------
Provision at federal statutory rates $ 148,779 $ 187,864 $ 176,634
Increase (decrease) resulting from:
Losses without income tax benefit 1,468 835 (2,784)
Foreign earnings taxed at different
rates, including withholding taxes (42,503) (30,517) (15,732)
State and local taxes, net of
federal benefit 12,287 9,230 10,603
Non-deductible restructuring costs 20,150 - -
Dividends paid to ESOP - - (1,170)
Other (4,893) (2,880) (772)
---------- ---------- ----------
Total provision for income taxes $ 135,288 $ 164,532 $ 166,779
========== ========== ==========
Appropriate US and foreign income taxes have been provided for
earnings of foreign subsidiary companies that are expected to be remitted
in the near future. The cumulative amount of undistributed earnings of
foreign subsidiaries which the Company intends to permanently invest and
upon which no deferred US income taxes have been provided is $992.4 million
at December 31, 1997. The additional US 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 $45.4 million would be
due upon remittance of these earnings.
As of December 31, 1997, the Company has US net operating loss and
credit carryforwards for federal income tax purposes of $37.4 million and
$5.1 million, respectively. These carryforwards were generated by Tyco
prior to the March 1997 merger with Mattel and do not include the net
operating loss carryforwards attributable to the acquisition of Universal
Matchbox Ltd. and subsidiaries ("Matchbox") discussed below.
The net operating loss carryovers expire during the years 2007 to
2011. $1.4 million of the tax credits have no expiration date, and $3.7
million of the tax credits will expire during 1998 to 2003. Both
carryforwards are subject to an annual limitation, but the Company expects
to utilize the losses and credits before the expiration of their
carryforward periods.
The Company has a US net operating loss carryforward of approximately
$46.2 million which was generated by the Matchbox companies prior to their
acquisition by Tyco. These loss carryforwards expire during the years 2000
to 2005 and are subject to an annual limitation, but the Company expects to
utilize these losses before the expiration of the carryforward periods.
Accordingly, the goodwill reported in the consolidated balance sheets
attributable to Tyco's 1991 acquisition of Matchbox has been reduced to
reflect the adjustment related to the tax effect of these losses.
Certain foreign subsidiaries have net operating loss carryforwards
totaling $144.6 million ($108.7 million with no expiration date, $34.3
million expiring during 1998 to 2002, and $1.6 million expiring after
2002).
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 1997, 1996 and 1995,
nonqualified stock options exercised resulted in credits to additional
paid-in capital totaling $17.9 million, $26.3 million and $8.5 million,
respectively.
The Internal Revenue Service has completed its examination of the
Company's federal income tax returns through December 31, 1991.
NOTE 3 - EMPLOYEE BENEFITS
- --------------------------
The Company and certain of its subsidiaries have various retirement plans
covering substantially all employees of these companies. Expense related
to these plans totaled $19.0 million, $16.2 million and $16.1 million in
1997, 1996 and 1995, respectively.
Pension Plans
- -------------
The Company provides defined benefit pension plans, which satisfy the
requirements of the Employee Retirement Income Security Act of 1974
("ERISA"), 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. Assets of
these plans are invested in equity securities, as well as corporate,
government and other fixed-income investments. With the exception of the
Fisher-Price Pension Plan, activity related to the Company's pension plans,
including those of foreign affiliates, was not significant during any year.
43
The components of net pension income for the Fisher-Price Pension
Plan, based upon an October valuation date for the years ended December 31,
1997, 1996 and 1995, are detailed below (in thousands):
For the Period Ended
----------------------------------
1997 1996 1995
---------- ---------- ----------
Service cost $ 2,594 $ 2,671 $ 2,547
Interest cost 10,327 8,866 7,924
Actual gain on plan assets (16,163) (16,997) (30,650)
Net amortization and deferral (2,435) (206) 16,881
Curtailment gain (826) - -
---------- ---------- ----------
Net pension income $ (6,503) $ (5,666) $ (3,298)
========== ========== ==========
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
-----------------------
1997 1996
---------- ----------
Vested benefits $(133,346) $(122,113)
Nonvested benefits (3,188) (3,498)
---------- ----------
Accumulated benefit obligation (136,534) (125,611)
Effect of projected future salary
increases (5,544) (5,768)
---------- ----------
Projected benefit obligation (142,078) (131,379)
Plan assets at fair value 202,887 157,507
---------- ----------
Plan assets in excess of projected
benefit obligation 60,809 26,128
Unrecognized net (gain) loss (28,271) 2,046
Unrecognized prior service cost 1,474 1,904
Unrecognized net asset at transition (3,854) (6,423)
---------- ----------
Prepaid pension asset $ 30,158 $ 23,655
========== ==========
For the Period
----------------------
1997 1996 1995
------ ------ ------
Assumptions:
Weighted average discount rate 7.75% 7.75% 7.25%
Rate of future compensation increases 4.00% 4.00% 4.00%
Long-term rate of return on plan
assets 11.00% 11.00% 10.00%
- ----------------------------------------------------------------
Other Retirement Plans
- ----------------------
Domestic employees are eligible to participate in the Company's 401(k)
savings plans, which are defined contribution plans satisfying ERISA
requirements. Under these plans, the Company makes contributions to a
trust based upon the employee's age and matches a portion of certain
amounts of voluntary employee contributions.
The Company maintains unfunded supplemental executive retirement plans
which are nonqualified defined benefit plans covering certain key
executives of Mattel, Inc. and its subsidiaries. For 1997, 1996 and 1995,
the accumulated and vested benefit obligations and related expense of these
plans were not significant.
Deferred Compensation and Excess Benefit Plans
- ----------------------------------------------
The Company provides a deferred compensation plan which permits certain
officers and key employees of Mattel, Inc. to elect to defer portions of
their compensation. The deferred compensation plan, together with certain
Company and employee contributions made to an excess benefit plan, earn
various rates of return. The liability for these plans as of December 31,
1997 and 1996 was $39.2 million and $29.4 million, respectively. The
Company's contribution to these plans and the related administrative
expense were not significant to the results of operations during any year.
In August 1996, the Company purchased group trust-owned life insurance
contracts designed to assist in funding these programs. The cash surrender
value of these policies, valued at $32.9 million and $25.1 million as of
December 31, 1997 and 1996, respectively, are held in an irrevocable rabbi
trust which is included in sundry assets in the consolidated balance
sheets.
Postretirement Benefits
- -----------------------
The Company maintains a contributory postretirement benefit plan for
domestic employees of Mattel. The plan provides for certain medical,
dental and life insurance benefits to retirees meeting certain age and
years of service requirements. The ongoing costs and obligations
associated with the Mattel, Inc. plan are not significant to the Company's
financial position and results of operations during any year.
Fisher-Price has an unfunded postretirement health insurance plan
covering certain eligible domestic employees hired prior to January 1,
1993. Those qualifying employees participate either in the Fisher-Price
group health insurance plans or a retiree medical account balance plan.
Details of the expense for the Fisher-Price plan recognized in the
consolidated financial statements for the years ended December 31, 1997,
1996 and 1995 are as follows (in thousands):
For the Year
----------------------------------
1997 1996 1995
---------- ---------- ----------
Service cost $ 284 $ 344 $ 432
Interest cost 2,465 2,496 2,539
---------- ---------- ----------
Net postretirement benefit cost $2,749 $2,840 $2,971
========== ========== ==========
Amounts included in the Company's consolidated balance sheets for this
plan are as follows (in thousands):
As of Year End
----------------------
1997 1996
---------- ----------
Current retirees $23,846 $25,748
Fully eligible active employees 4,640 1,982
Other active employees 4,829 5,452
---------- ----------
Accumulated postretirement benefit 33,315 33,182
obligation
Unrecognized net loss (1,213) (1,596)
---------- ----------
Accrued postretirement benefit liability $32,102 $31,586
========== ==========
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.75% for 1997 and 1996 and 7.25% for 1995. For
all participants, the health care cost trend rate for expected claim costs
was assumed to be 5.50% in 1997 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 1997 by approximately $0.3 million and increased the accumulated
postretirement benefit obligation as of December 31, 1997 by approximately
$3.5 million.
44
Incentive Awards
- ----------------
The Company's Long-Term Incentive Plan is a three-year plan available to
certain key executives of Mattel, Inc. Interim awards are paid annually
based upon the financial performance of the Company over a three-year
period. Amounts charged to operating expense in 1997 and 1996 under the
current plan were $13.8 million and $3.9 million, respectively. For the
year ended December 31, 1995, $13.4 million was charged to operating
expense for final awards under the plan previously in effect.
The Company also has discretionary annual incentive compensation plans
for officers and key employees based on the Company's performance and
subject to certain approvals of the Compensation/Options Committee of the
Board of Directors. For the years ended December 31, 1997, 1996 and 1995,
$23.2 million, $12.9 million and $12.8 million, respectively, were charged
to operating expense for awards under the Mattel plans and $10.0 million,
in 1996, for Tyco.
Prior to the merger, Tyco had a Long-Term Incentive Plan for certain
senior executives. Under this plan, Tyco awarded 160.0 thousand and 759.0
thousand Restricted Stock Units ("RSU") during 1996 and 1995, respectively.
The aggregate fair market value of the RSUs was being amortized to
compensation expense over the restriction period. At the time of the
merger, the RSUs were converted into approximately 244 thousand shares of
Mattel common stock which approximated the fair value of the RSUs on the
merger consummation date and the remaining unamortized amount of $5.1
million was charged to expense.
NOTE 4 - SEASONAL FINANCING AND LONG-TERM DEBT
- ----------------------------------------------
Seasonal Financing
- ------------------
Mattel maintains and periodically amends or replaces an unsecured revolving
credit agreement with a commercial bank group that is utilized to finance
the seasonal working capital requirements of its domestic and certain
international operations. The agreement in effect during 1997, which was
recently amended (see below), consists of unsecured facilities providing a
total of $1.0 billion in seasonal financing. Within the facility, up to
$600.0 million was a standard revolving credit line available for advances
and backup for commercial paper issuances (a five-year facility). Interest
was charged at various rates selected by the Company. The remaining $400.0
million (a five-year facility) was available for nonrecourse purchases of
certain trade accounts receivable of Mattel by the commercial bank group
providing the credit line. Outstanding receivables sold were reduced by
collections and could not exceed $400.0 million at any time. The agreement
required Mattel to comply with certain financial covenants for consolidated
debt-to-capital and interest coverage.
In addition, during 1997, Mattel renewed agreements providing for up
to $140.0 million of nonrecourse purchases of certain domestic trade
accounts receivable of the Company by a commercial bank. The Company also
entered into agreements with banks of its foreign subsidiaries for
nonrecourse sales of certain of its foreign subsidiary receivables.
To meet seasonal borrowing requirements of international operations in
addition to amounts funded by proceeds of its revolving credit agreement,
Mattel negotiates individual financing arrangements, generally with the
same groups of banks that provided credit in the prior year. International
credit lines total approximately $275 million, a portion of which is used
to support letters of credit. The Company expects to extend these credit
lines throughout 1998 and believes available amounts will be adequate to
meet its seasonal financing requirements.
Prior to the March 1997 merger, Tyco had both domestic and foreign
revolving credit facilities. The revolving credit facilities were secured
by a lien on substantially all of Tyco's domestic assets and were also
guaranteed by certain of its foreign subsidiaries. Additionally, certain
foreign subsidiaries of Tyco had agreements with various banks which
provided credit lines. In addition, Tyco had a domestic receivables
securitization facility whereby substantially all of its domestic accounts
receivable were sold to wholly-owned, bankruptcy remote subsidiaries which
were consolidated in the financial statements of the Company. These
subsidiaries purchased the accounts receivable with proceeds from
borrowings under a commercial paper facility. Upon consummation of the
merger, all borrowings under these credit lines were repaid and these
facilities and agreements were terminated.
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 Mattel and Tyco's domestic and international credit
lines is summarized as follows (in thousands):
For the Year
----------------------------
1997 1996 1995
-------- -------- --------
Balance at end of year
Domestic $ - $ - $ 39,759
International 17,468 28,924 36,684
Maximum amount outstanding
Domestic 558,000 567,000 500,000
International 67,000 113,000 124,000
Average borrowing
Domestic 178,000 215,000 284,000
International 40,000 72,000 69,000
Weighted average interest rate
on average borrowing
Domestic (computed daily) 5.7% 6.6% 7.3%
International (computed monthly) 11.9% 11.6% 12.2%
- ---------------------------------------------------------------------
Effective in March 1998, Mattel amended its revolving credit
agreement. The new agreement consists of unsecured facilities providing a
total of $1.0 billion in seasonal financing from substantially the same
group of commercial banks. The facilities provide for up to $700.0 million
in advances and backup for commercial paper issuances (a five-year
facility), and up to an additional $300.0 million (a five-year facility)
for nonrecourse purchases of certain trade accounts receivable by the bank
group. In connection with the agreement, Mattel is to comply with certain
financial covenants for consolidated debt-to-capital and interest coverage.
45
6-7/8% Senior Notes
- -------------------
The Company's $100.0 million of 6-7/8% Senior Notes issued in August 1992
were repaid upon maturity on August 1, 1997.
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 May and November. At December 31,
1997 and 1996, the bid prices for the 6-3/4% Senior Notes, as provided by
one of the underwriters, were $1,011.85 and $1,007.70, respectively, based
on a par value of $1,000.00.
10-1/8% Senior Subordinated Notes ("10-1/8% Notes")
- ---------------------------------------------------
Upon consummation of the merger, the Company assumed Tyco's $126.5 million
obligation related to the 10-1/8% Notes. On August 15, 1997, the Company
exercised its option and redeemed the 10-1/8% Notes at 103.797% of par
together with accrued interest. In the third quarter of 1997, the Company
recognized a pre-tax extraordinary loss of $7.3 million, and a related
income tax benefit of $2.7 million, as a result of the early retirement.
Medium-Term Notes ("MT Notes")
- ------------------------------
During the 1994 third quarter, the Company commenced a program for the
issuance of debt and equity securities under various shelf registration
statements. In October 1997, the Company filed its current universal shelf
registration statement allowing the issuance of up to $350.0 million of
debt and equity securities. As of December 31, 1997, $356.7 million of
debt and equity securities was available to be issued. The following is a
summary of MT Notes currently outstanding (in millions, except bid prices):
Bid Price (b)
----------------------------------------
Year Maturity
Issued Amount Date Rate (a) 1997 1996
- ----------------------------------------------------------------------------------
1994 $ 80.5 10/99-12/04 8.00%-8.55% $1,031.50-$1,117.80 $1,041.00-$1,096.60
1995 139.5 06/98-05/07 5.93%-7.65% 1,000.20- 1,062.90 998.70- 1,040.90
1997 310.0 11/04-07/12 6.70%-7.49% 1,022.58- 1,064.90 -
- ----------------------------------------------------------------------------------
<FN>
(a) Interest is payable semiannually at fixed rates on the fifteenth day
of May and November.
(b) Based on a par value of $1,000.00.
7% Convertible Subordinated Notes ("7% Notes")
- ----------------------------------------------
Upon consummation of the merger, the Company assumed Tyco's $16.0 million
obligation related to the 7% Notes. On September 10, 1997, the holder
converted all of the 7% Notes into 892.7 thousand shares of Mattel common
stock.
Mortgage Note
- -------------
In 1990, the Company borrowed $45.0 million under a mortgage agreement
secured by its headquarters office facility in El Segundo, California.
Interest accrues at 10.15% and monthly principal and interest payments are
due through December 2005. The fair value of the original mortgage note,
estimated by discounting future cash flows at the interest rates currently
available for debt with the same credit rating, similar terms and maturity
date, was approximately $57 million and $53 million at December 31, 1997
and 1996, respectively.
Scheduled Maturities
- --------------------
The aggregate amounts of long-term debt and other obligations maturing in
the next five years are as follows (in thousands):
6-3/4%
Senior MT Mortgage
Notes Notes Note Other Total
--------- ---------- -------- --------- ---------
1998 $ - $ 9,500 $500 $3,700 $ 13,700
1999 - 30,000 600 1,300 31,900
2000 100,000 - 600 700 101,300
2001 - 30,500 700 600 31,800
2002 - 30,000 800 300 31,100
- -------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY
- -----------------------------
Preference Stock and Preference Share Purchase Rights
- -----------------------------------------------------
The Company is authorized to issue 20.0 million shares of $0.01 par value
preference stock, of which none is currently outstanding. In February
1992, 1.5 million shares of $0.01 par value preference stock were
designated as Series E Junior Participating Preference Stock in connection
with a distribution of Preference Share Purchase Rights (the "Rights") to
the Company's common shareholders. 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 a change of control as defined in
the agreement. The Rights will expire on February 17, 2002, unless the
plan is further extended or the Rights are earlier redeemed or exchanged by
the Company.
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. On
October 20, 1995, the Company repurchased all outstanding preference stock
from the IGI ESOP for $73.9 million.
Preferred Stock
- ---------------
The Company is authorized to issue 3.0 million shares of $1.00 par value
preferred stock, of which 771.9 thousand shares and 826.4 thousand shares
were outstanding as of December 31, 1997 and 1996, respectively.
- - Series B Voting Convertible Exchangeable Preferred Stock ("Series B
Preferred Stock")
- ---------------------------------------------------------------------
During 1994, Tyco sold 47.6 thousand shares of Series B Preferred Stock to
a private investment group. Each share of Series B Preferred Stock was
converted into like Mattel preferred stock as a result of the March 1997
merger. Until April 15, 1996, Tyco paid dividends in the form of
additional shares of Series B Preferred Stock. Dividends issued in shares
in lieu of cash during 1996, 1995 and 1994 were valued at $1.7 million (or
1.6 thousand shares), $3.2 million (or 3.0 thousand shares) and $1.5
million (or 1.4 thousand shares), respectively. On December 2, 1997, all
outstanding shares of Series B Preferred Stock were converted by the
holders into 2.8 million shares of Mattel common stock.
46
- - Series C Mandatorily Convertible Redeemable Preferred Stock ("Series C
Preferred Stock")
- ------------------------------------------------------------------------
On June 28, 1996, Tyco received net proceeds of $92.7 million from the sale
of 772.8 thousand shares of Series C Preferred Stock. Each share of Series
C Preferred Stock was converted into like Mattel preferred stock as a
result of the March 1997 merger. The par value and liquidation preference
of the Series C Preferred Stock are $1.00 and $125.00 per share,
respectively. Dividends are cumulative and payable in cash on the first
day of each calendar quarter at the rate of $10.3125 per annum. Series C
Depositary Shares ("Depositary Shares"), each representing one twenty-fifth
of a share of Series C Preferred Stock, totaling 19.3 million shares, were
sold by the depositary as part of the above offering at an issue price of
$5.00 per share. Each Depositary Share was converted into a like Mattel
depositary share as a result of the March 1997 merger.
Shares of the Series C Preferred Stock (and the related Depositary
Shares) are convertible, at the option of the holders, at any time prior to
July 1, 2000 into Mattel common stock at a rate of 0.40064 common shares
for each Depositary Share, subject to adjustment under certain conditions.
The Company, at its option, may redeem the Series C Preferred Stock (and
the related Depositary Shares) at any time on or after July 1, 1999 for a
number of Mattel common shares equal to the call price (which is initially
set at $5.103 per Depositary Share and declines at specified times to
$5.000 per Depositary Share as of June 30, 2000) divided by the current
market price of Mattel common stock (as defined in the Certificate of
Designations) or 0.40064 common shares for each Depositary Share, whichever
is greater. On July 1, 2000, shares of the Series C Preferred Stock (and
the related Depositary Shares) are mandatorily convertible into 0.54301
Mattel common shares for each Depositary Share.
The Series C Preferred Stock entitles the holders of Depositary Shares
to vote (at the rate of 0.48876 common shares for each Depositary Share)
with the holders of the Company's common stock as a single class on all
matters on which the holders of the Company's common stock may vote.
Common Stock
- ------------
In May 1996, the shareholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation that increased the number
of shares of authorized common stock from 300.0 million to 600.0 million in
order to accommodate issuance of common stock in connection with possible
future mergers and other financing transactions, future stock dividends or
splits, future awards pursuant to the Company's stock option plans, warrant
exercises, and other general corporate purposes.
Stock Compensation Plans
- ------------------------
In May 1996, the shareholders of the Company approved the Mattel 1996 Stock
Option Plan. Under this plan, incentive stock options, nonqualified stock
options, stock appreciation rights, nonvested stock awards, and shares of
common stock may be granted to officers, key employees, and other persons
providing services to the Company. In addition, nonqualified stock options
may be granted to members of the Company's Board of Directors who are not
employees of the Company.
Generally, options are exercisable contingent upon the grantees'
continued employment with the Company. Nonqualified stock options are
granted at not less than 100% of the fair market value of the Company's
common stock on the date of grant, generally vest at the rate of 25% per
year of service, and usually expire within ten years from the date of
grant. The 1996 Stock Option Plan provides that up to 1.5% of Mattel's
outstanding common stock as of the first day of each calendar year will be
available for awards under the plan. The aggregate number of shares of
common stock available for grants under the 1996 plan shall not exceed 50.0
million shares. This plan expires on December 31, 2005. The Company's
previous plans, the 1982 and 1990 Stock Option Plans, expired on April 14,
1992 and December 31, 1996, respectively. All outstanding awards under
these plans continue to be exercisable under the terms of their respective
grant agreements.
Prior to the merger, Tyco had various incentive and non-qualified
stock option plans that provided benefits for eligible participants.
Effective with the merger, all stock options previously granted and
outstanding under these plans were exchanged for approximately 363 thousand
Mattel common shares (which approximated the fair value of the options as
of the merger consummation date).
Both Mattel and Tyco adopted the disclosure-only provisions of SFAS
No. 123. Accordingly, no compensation cost has been recognized in the
results of operations for nonqualified stock options granted under these
plans during the years ended December 31, 1997, 1996 and 1995. Had
compensation cost for nonqualified stock options been determined based on
their fair value at the date of grant consistent with the method of
accounting prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been reduced by $14.3 million or $0.05 per
basic and diluted share, $7.0 million or $0.02 per basic and diluted share,
and $2.2 million or $0.01 per basic and diluted share in 1997, 1996 and
1995, respectively. The pro forma effect on the Company's 1997, 1996 and
1995 net income is not indicative of the pro forma effect in future years,
because it does not take into consideration the pro forma expense related
to grants made prior to 1995.
The fair value of Mattel options granted during 1997, 1996 and 1995
has been estimated using the Black-Scholes pricing model. The following
weighted average assumptions were used in determining fair value:
1997 1996 1995
- -------------------------------------------------------------
Expected life (in years) 3.40 3.17 3.17
Risk-free interest rate 5.69% 6.05% 5.28%
Volatility factor 17.40% 17.98% 19.23%
Dividend yield 0.86% 0.82% 0.75%
- -------------------------------------------------------------
The weighted average fair value of Mattel options granted during 1997,
1996 and 1995 were $4.86, $5.12 and $3.25, respectively.
47
The following is a summary of stock option information and weighted
average exercise prices for Mattel's stock option plans during the year
(options in thousands):
1997 1996 1995
--------------- --------------- --------------
Number Price Number Price Number Price
- -------------------------- ------ ------ ------ ------ ------ -----
Outstanding at January 1 13,310 $18.05 14,513 $14.27 13,148 $12.73
Options granted 7,443 25.79 4,294 25.15 4,152 16.99
Options exercised (2,807) 14.89 (5,267) 13.48 (2,314) 10.52
Options canceled (639) 22.44 (230) 16.67 (473) 13.63
------ ------ ------
Outstanding at December 31 17,307 $21.73 13,310 $18.05 14,513 $14.27
====== ====== ======
Exercisable at December 31 5,999 $16.29 5,263 $14.41 5,541 $13.41
====== ====== ======
Available for grant at
December 31 1,072 4,074 921
====== ====== ======
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise
prices for Mattel stock options outstanding as of December 31, 1997
(options in thousands):
Options Outstanding Options Exercisable
-------------------------------- -------------------
Exercise Remaining
Price Ranges Number Life Price Number Price
- ---------------- ------ ----------- --------- ------ ---------
$ 2.42 to $11.58 713 4.68 $10.74 713 $10.74
14.02 to 18.00 5,734 6.41 15.84 4,522 15.66
18.10 to 25.50 3,386 8.29 24.50 478 24.46
25.75 to 41.38 7,474 9.05 26.05 286 26.45
------ ------
$ 2.42 to $41.38 17,307 7.85 $21.73 5,999 $16.29
====== ======
In December 1993, restricted stock awards totaling 927.7 thousand
shares were granted to key Mattel executives. During 1996, 244.1 thousand
shares were forfeited and returned to the Company. On January 1, 1997,
restrictions on the remaining 683.6 thousand shares lapsed. Compensation
expense of $2.8 million and $7.9 million was charged to income in 1996 and
1995, respectively. In addition, as a result of the forfeiture, $6.6
million of compensation expense that was recognized in previous periods was
reversed in 1996.
Premium Price Option Plan
- -------------------------
On November 6, 1997, the Compensation/Options Committee of the Board of
Directors approved a new Premium Price Stock Option Plan, subject to
shareholder approval at the May 1998 meeting. Options to purchase
approximately 18 million shares of common stock were granted in December
1997 with exercise prices 25% above and 33-1/3% above Mattel's six-month
average stock price prior to the grant date or the stock price on the date
of shareholder approval, whichever is greater. These options will be
forfeited unless the Company's stock price reaches the premium exercise
price by December 31, 1999 for options with a 25% premium price and
December 31, 2000 for options with a 33-1/3% premium price. Options
granted under the plan may not be exercised for three years and expire five
years from the date of grant. Each option included a Tandem Limited Stock
Appreciation Right which gives the holder the right to receive cash, shares
of common stock or any combination of cash and common shares upon the
occurrence of a change of control as defined in the plan.
Stock Subscription Warrants
- ---------------------------
The Company currently has outstanding warrants exercisable into 751.4
thousand shares of the Company's common stock at an exercise price of
approximately $4.77 per share. These warrants expire on June 30, 2000.
Disney Warrant
- --------------
In June 1996, the Company entered into a licensing agreement with Disney
Enterprises, Inc. Pursuant to this agreement, the Company issued Disney a
warrant to purchase 3.0 million shares of the Company's common stock at an
exercise price of $27.375 per share. This warrant cannot be exercised
prior to April 2, 1999 and expires no later than April 2, 2004. The fair
value of the warrant is charged to income when the related properties are
introduced as a component of royalty expense over the period the related
revenues are recognized. The warrant's fair value of $26.4 million was
determined using the Black-Scholes pricing model, assuming an expected life
of eight years, a dividend yield of 0.88%, a risk-free interest rate of
6.17%, and a volatility factor of 27.60%.
Common Stock Repurchase Plan
- ----------------------------
Mattel's common stock repurchase plan, initiated in May 1990, provides for
the repurchase of common shares to fund the Company's stock option plans
and provide for warrant exercises. The number of shares to be repurchased
is authorized on an annual basis by the Board of Directors based upon
anticipated reissuance needs.
During 1997, 1996, and 1995, Mattel repurchased 6.5 million, 10.0
million, and 2.9 million shares, respectively. In 1995, in addition to
shares acquired on the open market, the Company repurchased the equivalent
of 3.3 million shares of common stock in connection with its cash payment
to the IGI ESOP for all outstanding shares of Series F Preference Stock.
Dividends and Capital Transactions
- ----------------------------------
On February 6, 1996, the Board of Directors declared a five-for-four stock
split on Mattel's common stock, which was distributed on March 1, 1996.
Accordingly, $55.8 million was transferred from additional paid-in capital
to common stock, representing the par value of additional shares issued.
A regular quarterly cash dividend has been declared by the Mattel
Board of Directors on the Company's common stock since the second quarter
of 1990. The Board of Directors increased the quarterly cash dividend from
$0.06 per common share to $0.07 per common share in the second quarter of
1997. Tyco was precluded from paying cash dividends on its common stock
for the two years ended December 31, 1996 due to limitations set forth in
in its various debt agreements.
48
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, 1997 (in thousands):
Capitalized Operating
Leases Leases
----------- ---------
1998 $ 600 $ 43,800
1999 500 32,000
2000 300 25,400
2001 300 18,600
2002 300 14,000
Thereafter 9,900 12,900
----------- ---------
$11,900 (a) $146,700
=========== =========
<FN>
(a) Includes $9.0 million of imputed interest.
Rental expense under operating leases amounted to $61.5 million, $58.1
million and $58.3 million for 1997, 1996 and 1995, respectively, net of
sublease income of $0.3 million, $0.5 million and $0.7 million in 1997,
1996 and 1995, respectively.
Commitments
- -----------
In the normal course of business, the Company enters into contractual
arrangements to obtain and protect the Company's right to create and market
certain toys and for future purchases of goods and services to ensure
availability and timely delivery. Such arrangements include royalty
payments pursuant to licensing agreements and commitments for future
inventory purchases. Certain of these commitments routinely contain
provisions for guaranteed or minimum expenditures during the terms of the
contracts. Current and future commitments for guaranteed payments reflect
the Company's focus on expanding its product lines through alliances with
businesses in other industries, such as television and motion picture
entertainment companies.
The single largest commitment involves the Company's 1991 agreement
with The Walt Disney Company ("Disney"). This licensing agreement, which
contains annual minimum royalty guarantees, permits the Company to use the
Disney name and certain characters on preschool and infant products through
September 2002. In related agreements, the Company participates in
attractions and toy stores at three Disney theme parks under agreements in
effect through June 2002. Under these agreements, the Company makes semi-
annual payments to Disney.
In June 1996, the Company entered into a licensing agreement with
Disney Enterprises, Inc. for an expanded strategic alliance, which grants
the Company exclusive worldwide rights (with certain exceptions) to produce
toys based on all children-oriented Disney television and film properties
introduced, commencing summer 1997. The agreement spans three years, with
the Company having the right for up to two additional years to market
merchandise from film properties produced during the second and third
years. The initial term of the agreement may be renewed for an additional
three-year period upon mutual consent. This agreement contains minimum
royalty guarantees that are contingent upon the number and nature of the
properties introduced by Disney. Commitments for 1998 introductions are
expected to approximate $18.9 million payable over a three-year period.
Future commitments could be as high as $37.8 million per introduction year.
Pursuant to the agreement, the Company issued Disney a stock warrant,
valued at $26.4 million, to purchase 3.0 million shares of the Company's
common stock.
Licensing and related agreements provide for terms extending from 1998
through 2002 and contain provisions for future minimum payments as shown in
the following table (in thousands):
Minimum
Payments
---------
1998 $ 92,000
1999 79,000
2000 72,000
2001 70,000
2002 47,000
---------
$360,000
=========
Royalty expense for the years ended December 31, 1997, 1996 and 1995
was $194.1 million, $155.3 million and $137.4 million, respectively.
As of December 31, 1997, the Company had outstanding commitments for
1998 purchases of inventory of approximately $90 million.
Foreign Currency Contracts
- --------------------------
The Company enters into foreign currency forward exchange and option
contracts primarily as hedges of inventory purchases, sales and other
intercompany transactions denominated in foreign currencies, to limit the
effect of exchange rate fluctuations on the results of operations and cash
flows. These contracts generally have maturity dates of up to 18 months.
Gains or losses related to firm commitments, which qualify for hedge
accounting, are deferred and are recognized in the results of operations as
part of the underlying transaction. Contracts that do not qualify for
hedge accounting are marked to market with gains and losses recognized in
the results of operations currently. Had the Company not entered into
hedges to limit the effect of exchange rate fluctuations on results of
operations and cash flows, the unfavorable effect on 1997 pre-tax income
would have approximated $20 million.
As of December 31, 1997 and 1996, the Company held the following
contracts to sell foreign currencies (in thousands):
1997 1996
---------------------- ----------------------
Notional Notional
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
Forwards $353,085 $500,191
Options 93,547 5,500
---------- ----------
$446,632 $441,669 $505,691 $495,800
========== ========== ========== ==========
Fair value for forwards 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
1997 and 1996,
49
respectively. Fair value for options reflects the notional
amount of US dollars the Company would receive from the current contracts,
less the respective year-end option value. The option value is determined
based on dealer quotes for contracts involving the same currencies and
maturity dates.
As of December 31, 1997 and 1996, the Company held $362.1 million and
$165.9 million notional amount, respectively, of foreign currency forward
exchange contracts to purchase foreign currencies. The fair value of these
contracts was $346.5 million and $166.0 million for December 31, 1997 and
1996, respectively. 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
1997 and 1996, respectively.
The following table summarizes the Company's foreign currency
contracts by major currency as of December 31, 1996 and 1995 (in thousands
of US dollars):
1997 1996
---------------------- ----------------------
Buy Sell Buy Sell
---------- ---------- ---------- ----------
US dollars $446,632 $362,083 $505,691 $161,965
German marks 19,179 73,977 44,735 103,574
Italian lira 38,277 53,161 8,324 59,265
Malaysian ringgits 53,304 - 56,475 -
Hong Kong dollars 148,084 2,527 - 13,429
French francs - 52,756 429 63,852
British pounds sterling 32,548 72,580 26,501 50,319
Canadian dollars 22,608 - 11,002 40,204
Spanish pesetas - 19,363 - 23,171
Dutch guilders 12,778 49,967 - 74,864
Japanese yen - 7,956 - 7,913
Australian dollars 6,398 - - 28,187
Belgian francs - 60,038 - 29,810
Swiss francs 13,677 - 11,955 -
Mexican peso - 50,200 - 5,500
Indonesian rupiah 15,230 - - -
Other (under $5,000) - 4,107 6,505 9,564
---------- ---------- ---------- ----------
$808,715 $808,715 $671,617 $671,617
========== ========== ========== ==========
In order to minimize the risk of counterparty non-performance, the
Company executes its foreign currency forward exchange and option contracts
with financial institutions believed to be credit-worthy, generally those
that provide the Company with its working capital lines of credit.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot
be predicted with certainty. The Company seeks to mitigate its exposure to
market risk by monitoring its currency exchange exposure for the year and
partially or fully hedging such exposure. In addition, the Company manages
its exposure through the selection of currencies used for international
borrowings and intercompany invoicing. The Company does not trade in
financial instruments for speculative purposes.
Litigation
- ----------
The Company is involved in various litigation and other legal matters,
including claims related to intellectual property, product liability, labor
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
- --------------------------------------------
Business Combination
- --------------------
Pursuant to an Agreement and Plan of Merger 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.
Selected financial information for the combining entities included in
the consolidated statements of income for the quarter ended March 31, 1997
(unaudited) and the two years ended December 31, 1996 and 1995 are as
follows (in thousands):
For the Period
--------------------------------------
March 31, December 31, December 31,
1997 1996 1995
- --------------------------------------------------------------------
Net sales
Mattel $ 568,528 $3,785,958 $3,638,812
Tyco (a) 124,992 749,374 731,004
--------- ---------- ----------
Combined $ 693,520 $4,535,332 $4,369,816
========= ========== ==========
Net income
Mattel $ 13,123 $ 377,641 $ 357,802
Tyco (b) (7,747) (5,417) (19,913)
Integration/restructuring
charge (c) (210,000) - -
--------- ---------- ----------
Combined $(204,624) $ 372,224 $ 337,889
========= ========== ==========
<FN>
(a) Certain amounts have been classified differently than previously
published amounts in order to conform the accounting presentation
of the two entities.
(b) The provision for income taxes has been adjusted by $3.4 million
and $7.3 million in 1996 and 1995, respectively, 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.
(c) The integration and restructuring charge of $275.0 million, after
related income tax effects, reduced earnings of the combined
company by $210.0 million.
50
Restructuring Charges
- ---------------------
In connection with the Tyco merger, the Company commenced an integration
and restructuring plan and recorded a $275 million pre-tax charge against
operations in March 1997. The plan consisted of consolidating certain
manufacturing and distribution operations, eliminating duplicative
marketing and administrative offices, terminating various distributor and
licensing arrangements and abandoning certain product lines. Included in
the charge was approximately $86 million for estimated severance costs
related to the elimination of 2,700 positions principally associated with
facilities to be closed. The remainder of the charge consisted of
transaction costs related to the merger, asset write-downs and contract
termination expenses. Of the total pre-tax charge, approximately $90
million represents non-cash asset write-downs. Through December 31, 1997,
the total integration and restructuring expenditures and write-offs were
approximately $166 million, $46 million of which related to severance
payments. The plan is expected to be substantially completed in 1998.
During 1995, Tyco adopted restructuring programs to reduce operating
expenses in Europe and at the Tyco Preschool unit which resulted in a pre-
tax charge against continuing operations of $8.9 million. As of December
31, 1996, the restructuring activity provided for by these charges was
substantially complete and amounts previously accrued had been paid. The
type and amount of charges incurred approximated the amounts included in
these provisions.
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.
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's products are sold directly in most of the
European and Asian countries, and mainly through distributors in certain
Latin American countries.
Customers accounting for more than 10% of the Company's consolidated
net sales and related accounts receivable are as follows (dollars in
millions):
1997 1996 1995
---------- ---------- ----------
Worldwide sales for the year ended
- ----------------------------------
Toys R Us 18% 23% 23%
Wal-Mart 15% 12% 12%
Accounts receivable as of December 31
- -------------------------------------
Toys R Us $260.7 $185.0 $157.6
Wal-Mart 178.6 90.4 78.1
- -------------------------------------------------------------------------
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. Intercompany sales are based upon
transfer prices which include manufacturing cost and profit.
Profit From Identifiable
(In thousands) Net Sales Operations Assets
- -------------- ----------- ------------ ------------
1997
United States $ 3,342,916 $ 436,800 $1,965,487
Europe and Canada 1,159,639 183,901 669,635
Asia and Latin America 2,110,952 289,823 695,183
----------- ------------ -----------
6,613,507 910,524 3,330,305
Intercompany sales
United States (383,147) - -
Europe and Canada (88,872) - -
Asia and Latin America (1,306,872) - -
Interest expense - (90,130) -
Corporate and other (a) - (395,312) 473,486
----------- ------------ -----------
Consolidated total $ 4,834,616 $ 425,082 $3,803,791
=========== ============ ===========
1996
United States $ 3,099,604 $ 367,219 $1,838,912
Europe and Canada 1,361,188 184,387 764,899
Asia and Latin America 1,785,167 205,889 666,633
----------- ------------ -----------
6,245,959 757,495 3,270,444
Intercompany sales
United States (403,796) - -
Europe and Canada (135,232) - -
Asia and Latin America (1,171,599) - -
Interest expense - (100,226) -
Corporate and other - (120,513) 310,698
----------- ------------ -----------
Consolidated total $ 4,535,332 $ 536,756 $3,581,142
=========== ============ ===========
1995
United States $ 3,024,083 $ 350,894 $1,577,185
Europe and Canada 1,407,628 210,476 832,392
Asia and Latin America 1,553,865 142,452 570,191
----------- ------------ -----------
5,985,576 703,822 2,979,768
Intercompany sales
United States (464,343) - -
Europe and Canada (124,356) - -
Asia and Latin America (1,027,061) - -
Interest expense - (102,983) -
Corporate and other - (96,171) 361,602
----------- ------------ -----------
Consolidated total $ 4,369,816 $ 504,668 $3,341,370
=========== ============ ===========
<FN>
(a) Corporate operating profit includes the Tyco integration and Mattel
restructuring charge of $275.0 million.
51
NOTE 9 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------
(In thousands, except per share First Second Third Fourth
amounts) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 (a)
Net sales $ 693,520 $972,656 $1,555,347 $1,613,093
Gross profit 322,811 458,837 800,277 818,075
Advertising and promotion expenses 102,626 131,713 244,231 300,569
Other selling and administrative
expenses 185,286 192,707 198,767 220,192
Restructuring and integration
charges (b) 275,000 - - -
Other expense, net 7,882 7,959 14,892 2,964
Operating profit (c) 27,017 126,458 342,387 294,350
Income (loss) before taxes and
extraordinary item (267,619) 107,944 317,755 267,002
Extraordinary item - loss on early
retirement of debt - - (4,610) -
Net income (loss) (204,624) 75,634 219,045 195,129
Preferred stock dividend
requirements (2,840) (2,837) (2,838) (1,990)
Net income (loss) applicable to
common shares (207,464) 72,797 216,207 193,139
Basic income (loss) per common
share:
Income (loss) before extraordinary
item $ (0.72) $ 0.25 $ 0.76 $ 0.66
Extraordinary item - loss on early
retirement of debt - - (0.02) -
Net income (loss) $ (0.72) $ 0.25 $ 0.74 $ 0.66
Average number of common shares 288,382 291,737 290,650 290,962
Diluted income (loss) per common
share:
Income (loss) before extraordinary
item $ (0.72) $ 0.25 $ 0.73 $ 0.64
Extraordinary item - loss on early
retirement of debt - - (0.02) -
Net income (loss) $ (0.72) $ 0.25 $ 0.71 $ 0.64
Average number of common and
common equivalent shares 288,382 296,609 306,870 306,053
Dividends declared per common
share $ 0.06 $ 0.07 $ 0.07 $ 0.07
Common stock market price:
High $ 29.25 $ 35.25 $ 35.75 $ 41.38
Low 24.00 24.00 32.38 33.38
YEAR ENDED DECEMBER 31, 1996 (a)
Net sales $ 683,999 $921,583 $1,497,916 $1,431,834
Gross profit 322,874 436,024 750,773 710,087
Advertising and promotion expenses 100,104 129,524 240,303 308,988
Other selling and administrative
expenses 169,581 183,216 204,584 214,954
Other expense, net 4,499 8,704 9,459 8,860
Operating profit (c)(d) 48,690 114,580 296,427 177,285
Income before taxes 28,797 92,590 268,176 147,193
Net income 20,534 63,370 181,375 106,945
Preferred stock dividend
requirements (827) (889) (2,838) (2,837)
Net income applicable to common
shares 19,707 62,481 178,537 104,108
Basic income per share:
Net income $ 0.07 $ 0.21 $ 0.62 $ 0.36
Average number of common shares 293,371 292,890 289,182 287,544
Diluted income per share:
Net income $ 0.07 $ 0.21 $ 0.59 $ 0.35
Average number of common and
common equivalent shares 298,858 297,916 305,707 303,594
Dividends declared per common
share $ 0.06 $ 0.06 $ 0.06 $ 0.06
Common stock market price:
High $ 28.30 $ 28.88 $ 29.13 $ 31.50
Low 23.90 24.38 22.13 24.63
- ---------------------------------------------------------------------------------
<FN>
(a) Financial information for the first quarter of 1997 and all quarters in
1996 has been restated retroactively for the effects of the March 1997
merger with Tyco, accounted for as a pooling of interests.
(b) Represents a nonrecurring charge for transaction, integration and
restructuring costs related to the merger with Tyco.
(c) Represents income from operations before interest expense, provision for
income taxes and in 1997, restructuring and integration charges.
(d) Fourth quarter operating profit includes a $21.8 million nonrecurring
charge related to the accounting for certain royalties and participation
fees in prior periods.
52
NOTE 10 - SUPPLEMENTAL FINANCIAL INFORMATION
- --------------------------------------------
As of Year End
----------------------
(In thousands) 1997 1996
- ------------------------------------------ ---------- ----------
INVENTORIES INCLUDE THE FOLLOWING:
Raw materials and work in process $ 48,620 $ 70,121
Finished goods 380,224 374,057
---------- ----------
$428,844 $444,178
========== ==========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
INCLUDE THE FOLLOWING:
Deferred income taxes $170,626 $101,075
Other 75,903 94,598
---------- ----------
$246,529 $195,673
========== ==========
INTANGIBLE ASSETS, NET, INCLUDE THE
FOLLOWING:
Goodwill $534,128 $600,851
Other 8,631 10,559
---------- ----------
$542,759 $611,410
========== ==========
ACCRUED LIABILITIES INCLUDE THE
FOLLOWING:
Advertising and promotion $144,020 $131,242
Mattel restructuring and
Tyco integration 108,581 -
Royalties 79,304 63,558
Defective returns 37,314 57,176
Other 260,226 258,715
---------- ----------
$629,445 $510,691
========== ==========
For the Year
-------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------ --------- ---------- ----------
SELLING AND ADMINISTRATIVE EXPENSES
INCLUDE THE FOLLOWING:
Research and development $156,350 $147,174 $132,020
- -------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Income taxes $105,812 $107,944 $169,923
Interest 94,320 99,019 100,544
Noncash investing and financing
activities:
Issuance of stock warrant - 26,444 -
Conversion of 7% Notes 16,034 - -
- -------------------------------------------------------------------------
53
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 LLP, 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 auditing standards and perform such tests and related procedures
as they deem necessary to arrive at an opinion on the fairness of the
financial statements.
/s/ Harry J. Pearce
- -------------------
Harry J. Pearce
Chief Financial Officer
54
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders of Mattel, Inc.
In our opinion, based on 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, 1997 and 1996,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, 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 financial statements of
Tyco Toys, Inc. and its subsidiaries, which statements reflect total
assets of $646,339,000 at December 31, 1996 and net sales of
$720,954,000 and $709,109,000 for each of the two years in the period
ended December 31, 1996. 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 Tyco Toys, 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
- ------------------------
Price Waterhouse LLP
Los Angeles, California
February 2, 1998
55
DIRECTORS AND OFFICERS
----------------------
Mattel, Inc. and Subsidiaries
BOARD OF DIRECTORS CORPORATE OFFICERS
Jill E. Barad (1) Jill E. Barad
Chairman and Chief Executive Officer, Chairman and Chief Executive Officer
Mattel, Inc.
John W. Amerman (1) Bruce L. Stein
Retired Chairman and Chief Executive President, Mattel Worldwide and Chief
Officer, Mattel, Inc. Operating Officer
Dr. Harold Brown (4)(5) Astrid Autolitano
Senior Managing Director, E.M. Warburg, President, Mattel International
Pincus & Co., LLC
Tully M. Friedman (1)(3)(6) Gary S. Baughman
Founding Partner, Friedman & Fleischer, President, Fisher-Price, Inc.
LLC
Joseph C. Gandolfo (5) Joseph C. Gandolfo
President, Worldwide Manufacturing President, Worldwide Manufacturing
Operations, Mattel, Inc. Operations
Ronald M. Loeb (3)(6) Ned Mansour
Of Counsel, Irell & Manella President, Corporate Operations and
General Counsel
Ned Mansour (6) Francesca Luzuriaga
President, Corporate Operations and Executive Vice President, Worldwide
General Counsel, Mattel, Inc. Business Planning and Resources
Edward N. Ney (4)(5) Harry J. Pearce
Chairman of the Board of Advisors, Chief Financial Officer
Burson-Marsteller and Chairman,
Marsteller Advertising
William D. Rollnick (1)(2)(3) Glenn Bozarth
Retired Chairman, Genstar Rental Senior Vice President, Corporate
Electronics, Inc. Communications
Christopher A. Sinclair (2) Fermin Cuza
President and Chief Executive Officer, Senior Vice President, International
Quality Food Centers Trade and Worldwide Government
Affairs
Bruce L. Stein (4) Kevin M. Farr
President, Mattel Worldwide and Chief Senior Vice President and Controller
Operating Officer, Mattel, Inc.
John L. Vogelstein (1)(2)(3)(6) Douglas Glen
Vice Chairman of the Board, President, Senior Vice President and
and Director, E.M. Warburg, Pincus Chief Strategy Officer
& Co., LLC
John T. Phippen
Senior Vice President and Chief
Information Officer
William Stavro
Senior Vice President and
Treasurer
<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 N. Ney, Chairman
(5) Member, Foundation Committee
Dr. Harold Brown, Chairman
(6) Member, Nominations/Corporate Governance Committee
Ronald M. Loeb, Chairman
56
CORPORATE INFORMATION
---------------------
Mattel, Inc. and Subsidiaries
Transfer Agent and Registrar
- ----------------------------
Mattel, Inc. Common Stock
BankBoston, N.A.
c/o Boston EquiServe, L.P.
Depositary
- ----------
Mattel, Inc. Depositary Shares, each
representing one twenty-fifth of a
share of Series C Mandatorily
Convertible Redeemable Preferred
Stock
BankBoston, N.A.
c/o Boston Equiserve, L.P.
Note Trustees
- -------------
Mattel, Inc. 6-3/4% Senior Notes due May 15, 2000
PNC Bank, N.A.
One Oliver Plaza, 27th Floor
Pittsburgh, Pennsylvania 15222-2602
Mattel, Inc. Medium-Term Notes
Chemical Trust Company of California
101 California Street, Suite 2725
San Francisco, California 94111
Stock Exchange Listings
- -----------------------
Mattel, Inc. Common Stock and Mattel, Inc. Preference
Share Purchase Rights
New York Stock Exchange and Pacific Exchange, Inc.
Mattel, Inc. Depositary Shares
New York Stock Exchange
Shareholder Administration
- --------------------------
Inquiries relating to shareholder accounting records, stock
transfer and dividends (including dividend reinvestment)
should be directed to:
BankBoston, N.A.
c/o Boston EquiServe, L.P.
150 Royall Street
Canton, Massachusetts 02021
(overnight or courier delivery only) or
P.O. Box 644
Boston, Massachusetts 02102
Telephone: 888-909-9922
Common Shareholders
- -------------------
As of March 1, 1998, there were approximately 46,000
holders of record of Mattel, Inc. common stock
Annual Meeting
- --------------
The Annual Meeting of Shareholders will be held May 6,
1998, at 10:00 a.m. in the Manhattan Ballroom of the
Manhattan Beach Marriott, 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,
1997, is available upon request by writing to the
Secretary of the Company, 333 Continental Boulevard,
El Segundo, California 90245
Trademark Legends
- -----------------
Barbie, Fisher-Price, Hot Wheels, See 'N Say, Magna Doodle,
View-Master, Power Wheels, Matchbox, PrintPaks and Tyco are
registered trademarks of Mattel, Inc.
Disney characters: [copyright] Disney. Pooh character
is based on the "Winnie the Pooh" works, Copyright
A.A. Milne and E.H. Shepard. GRAND PRIX and PONTIAC are
trademarks of Pontiac Division, General Motors Corporation,
and used under license to Mattel, Inc. Kyle Petty name
and/or likeness used under license from Petty Enterprises
Two, Inc. CTW characters: [copyright] 1998 Children's
Television Workshop. Sesame Street Muppets: [copyright] 1998
Jim Henson Productions, Inc. Olympic Skater is a registered
trademark of the U.S. Olympic Committee. Vera Wang is the
trademark of V.E.W., Ltd. The X-Files [trademark] and
[copyright] 1998 Twentieth Century Fox Film Corporation.
Oscar de la Renta is a trademark of Oscar de la Renta, Ltd.
WNBA and NBA are trademarks used under license.
"Daytona 500" is licensed from Daytona Properties.
[copyright] 1998 Mattel, Inc.
All Rights Reserved
Printed in U.S.A.
Printed on recycled paper.