SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
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MATTEL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-1567322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
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(Former name, former address and former fiscal year,
if changed since last report) None
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares outstanding of registrant's common stock, $1.00 par value,
(including 3,076,014 common shares issuable upon exchange of outstanding
exchangeable shares of Softkey software Products Inc.) as of April 28, 2000:
425,678,667 shares
PART I - FINANCIAL INFORMATION
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, March 31, Dec. 31,
(In thousands) 2000 1999 1999
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Assets
Current Assets
Cash and short-term investments $ 214,937 $ 50,215 $ 247,354
Accounts receivable, net 897,196 855,855 1,001,972
Inventories 522,299 562,003 436,316
Prepaid expenses and other current assets 196,762 290,248 166,217
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Total current assets 1,831,194 1,758,321 1,851,859
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Property, Plant and Equipment
Land 34,696 34,763 34,882
Buildings 264,770 268,909 270,185
Machinery and equipment 549,693 521,478 552,625
Capitalized leases 23,271 21,406 23,271
Leasehold improvements 73,743 86,679 74,812
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946,173 933,235 955,775
Less: accumulated depreciation 437,480 387,039 422,142
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508,693 546,196 533,633
Tools, dies and molds, net 184,982 187,339 191,158
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Property, plant and equipment, net 693,675 733,535 724,791
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Other Noncurrent Assets
Intangibles, net 1,186,194 1,242,380 1,200,622
Net investment in discontinued operations 318,687 401,055 457,158
Other assets 542,710 212,513 434,706
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$4,572,460 $4,347,804 $4,669,136
=======================================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated results for March 31, 1999 have been restated retroactively for the
effects of the May 1999 merger with The Learning Company, Inc. ("Learning
Company"), accounted for as a pooling of interests. See Note 2.
2
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
March 31, March 31, Dec. 31,
(In thousands, except share data) 2000 1999 1999
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Liabilities and Stockholders' Equity
Current Liabilities
Short-term borrowings $ 848,698 $ 259,435 $ 369,549
Current portion of long-term liabilities 2,773 33,401 3,173
Accounts payable 218,106 200,121 293,277
Accrued liabilities 438,682 419,895 714,633
Income taxes payable 164,528 175,535 179,961
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Total current liabilities 1,672,787 1,088,387 1,560,593
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Long-Term Liabilities
Senior notes 400,000 400,000 400,000
Medium-term notes 540,500 540,500 540,500
Mortgage note 42,213 42,856 42,380
Other 172,442 148,953 162,976
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Total long-term liabilities 1,155,155 1,132,309 1,145,856
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Stockholders' Equity
Preferred stock, Series A $0.01 par value, $200.00
liquidation preference per share, 750.0 thousand
shares authorized, issued and outstanding at
March 31, 1999 - 8 -
Preferred stock, Series C $1.00 par value, $125.00
liquidation preference per share, 772.8 thousand
shares authorized; 771.9 thousand shares issued and
outstanding at March 31, 1999 - 772 -
Special voting preferred stock $1.00 par value, $10.00
liquidation preference per share, one share authorized,
issued and outstanding, representing the voting rights
of 2.6 million, 5.1 million and 3.2 million outstanding
exchangeable shares, respectively - - -
Common stock $1.00 par value, 1.0 billion shares
authorized; 434.3 million shares, 405.4 million shares
and 433.6 million shares issued, respectively 434,345 405,403 433,563
Additional paid-in capital 1,729,447 1,847,263 1,728,954
Deferred compensation - (11,933) -
Treasury stock at cost; 11.8 million shares, 14.2 million
shares, and 12.0 million shares, respectively (355,453) (494,007) (361,825)
Retained earnings 192,043 605,362 401,642
Accumulated other comprehensive loss (255,864) (225,760) (239,647)
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Total stockholders' equity 1,744,518 2,127,108 1,962,687
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$4,572,460 $4,347,804 $4,669,136
===========================================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated results for March 31, 1999 have been restated retroactively for the
effects of the May 1999 merger with Learning Company, accounted for as a pooling
of interests. See Note 2.
3
Mattel, Inc. and Subsidiaries
Consolidated Statements of Operations
For the
Three Months Ended
-----------------------------------------
March 31, March 31,
(In thousands, except per share amounts) 2000 1999
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Net Sales $ 693,261 $688,315
Cost of sales 378,904 372,941
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Gross Profit 314,357 315,374
Advertising and promotion expenses 91,287 91,161
Other selling and administrative expenses 254,199 201,519
Amortization of intangibles 12,532 13,012
Interest expense 24,356 24,858
Other (income) expense, net (6,373) 2,244
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Loss Before Income Taxes (61,644) (17,420)
Benefit for income taxes (17,014) (4,790)
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Loss From Continuing Operations (44,630) (12,630)
Discontinued Operations (See Note 2)
(Loss) income from discontinued operations, net of taxes of
$(53.0) million and $10.0 million, respectively (126,606) 17,679
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Net (Loss) Income (171,236) 5,049
Less: preferred stock dividend requirements - 1,990
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Net (Loss) Income Applicable to Common Shares $(171,236) $ 3,059
============================================================================================================
(Loss) Income Per Common Share - Basic
Loss from continuing operations $ (0.10) $ (0.04)
(Loss) income from discontinued operations (0.30) 0.05
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Net (loss) income $ (0.40) $ 0.01
============================================================================================================
Weighted average number of common shares 425,495 396,480
============================================================================================================
(Loss) Income Per Common Share - Diluted
Loss from continuing operations $ (0.10) $ (0.03)
(Loss) income from discontinued operations (0.30) 0.04
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Net (loss) income $ (0.40) $ 0.01
============================================================================================================
Weighted average number of common and common
equivalent shares 425,495 422,264
============================================================================================================
Dividends Declared Per Common Share $ 0.09 $ 0.08
============================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated results for March 31, 1999 have been restated retroactively for the
effects of the May 1999 merger with Learning Company, accounted for as a pooling
of interests. See Note 2.
4
Mattel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the
Three Months Ended
-----------------------------
March 31, March 31,
(In thousands) 2000 1999
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Cash Flows From Operating Activities:
Net (loss) income $(171,236) $ 5,049
Deduct: (loss) income from discontinued operations (126,606) 17,679
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Loss from continuing operations (44,630) (12,630)
Adjustments to reconcile loss from continuing operations to net cash flows
from operating activities:
Depreciation 47,097 45,926
Amortization 14,088 13,582
Increase (decrease) from changes in assets and liabilities:
Accounts receivable 98,041 76,575
Inventories (88,324) 5,253
Prepaid expenses and other current assets (3,610) (13,789)
Accounts payable, accrued liabilities and income taxes payable (396,980) (337,816)
Other, net 7,929 (7,709)
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Net cash flows used for operating activities of continuing operations (366,389) (230,608)
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Cash Flows From Investing Activities:
Purchases of tools, dies and molds (21,336) (27,218)
Purchases of other property, plant and equipment (15,017) (19,000)
Proceeds from sale of other property, plant and equipment 2,212 3,291
Other, net 1,570 (502)
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Net cash flows used for investing activities of continuing operations (32,571) (43,429)
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Cash Flows From Financing Activities:
Short-term borrowings, net 477,904 135,950
Exercise of stock options including related tax benefit 1,858 809
Payment of dividends on common and preferred stock (38,461) (22,952)
Other, net (543) (187)
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Net cash flows from financing activities of continuing operations 440,758 113,620
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Net Cash Used For Discontinued Operations (73,811) -
Effect of Exchange Rate Changes on Cash (404) (1,822)
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Decrease in Cash and Short-term Investments (32,417) (162,239)
Cash and Short-term Investments at Beginning of Period 247,354 212,454
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Cash and Short-term Investments at End of Period $ 214,937 $ 50,215
============================================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated results for March 31, 1999 have been restated retroactively for the
effects of the May 1999 merger with Learning Company, accounted for as a pooling
of interests. See Note 2.
5
Mattel, Inc. and Subsidiaries
Notes To Consolidated Financial Information
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments considered necessary for a fair
presentation of Mattel, Inc. and its subsidiaries' ("Mattel") financial
position and interim results as of and for the periods presented have been
included. Certain amounts in the financial statements for prior periods have
been reclassified to conform with the current period's presentation. Because
Mattel's business is seasonal, results for interim periods are not
necessarily indicative of those which may be expected for a full year.
The financial information included herein should be read in conjunction with
Mattel's consolidated financial statements and related notes in its 1999
Annual Report to Stockholders filed on Form 10-K.
2. In May 1999, Mattel completed its merger with Learning Company, after which
Learning Company was merged with and into Mattel, with Mattel being the
surviving corporation. Each share of Learning Company Series A Preferred
Stock was converted into 20 shares of Learning Company common stock
immediately prior to the consummation of the merger. Pursuant to the merger
agreement, each outstanding share of Learning Company common stock was then
converted into 1.2 shares of Mattel common stock upon consummation of the
merger. As a result, approximately 126 million Mattel common shares were
issued in exchange for all shares of Learning Company common stock
outstanding as of the merger date. The outstanding share of Learning Company
special voting stock was converted into one share of Mattel Special Voting
Preferred Stock. Each outstanding exchangeable share of Learning Company's
Canadian subsidiary, Softkey Software Products Inc., remains outstanding,
but upon consummation of the merger became exchangeable for 1.2 shares of
Mattel common stock. This transaction was accounted for as a pooling of
interests.
On March 31, 2000, Mattel's board of directors resolved to sell its Consumer
Software segment, which is comprised primarily of the assets of Learning
Company. As a result of this decision, the Consumer Software segment is
being reported as a discontinued operation effective March 31, 2000, and the
consolidated financial statements have been reclassified to segregate the
net investment in and operating results of the Consumer Software segment.
Mattel expects to sell the Consumer Software segment by the end of the year
2000 and expects to record a gain for accounting purposes upon disposal. Net
sales of the Consumer Software segment were $64.4 million and $190.6 million
for the three months ended March 31, 2000 and 1999, respectively.
6
3. Accounts receivable are shown net of allowances for doubtful accounts of
$27.0 million (March 31, 2000), $34.5 million (March 31, 1999), and $29.9
million (December 31, 1999).
4. Inventories are comprised of the following:
(In thousands) March 31, 2000 March 31, 1999 Dec. 31, 1999
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Raw materials and work in process $ 51,232 $ 58,903 $ 41,452
Finished goods 471,067 503,100 394,864
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$522,299 $562,003 $436,316
==========================================================================================================================
5. Intangibles, net include the following:
(In thousands) March 31, 2000 March 31, 1999 Dec. 31, 1999
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Goodwill $1,177,212 $1,231,834 $1,191,227
Other 8,982 10,546 9,395
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$1,186,194 $1,242,380 $1,200,622
==========================================================================================================================
6. Senior notes include the following:
(In thousands) March 31, 2000 March 31, 1999 Dec. 31, 1999
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6-3/4% due 2000 $100,000 $100,000 $100,000
6% due 2003 150,000 150,000 150,000
6-1/8% due 2005 150,000 150,000 150,000
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$400,000 $400,000 $400,000
==========================================================================================================================
7. Comprehensive loss is as follows:
For the Three Months Ended
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(In thousands) March 31, 2000 March 31, 1999
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Loss from continuing operations $ (44,630) $(12,630)
(Loss) income from discontinued operations (126,606) 17,679
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Net (loss) income (171,236) 5,049
Unrealized holding gain (loss) on securities 560 (3,876)
Currency translation adjustments (16,777) (23,986)
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Comprehensive loss $(187,453) $(22,813)
====================================================================================================
8. Supplemental disclosure of cash flow information is as follows:
For the Three Months Ended
----------------------------------------------
(In thousands) March 31, 2000 March 31, 1999
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Cash payments during the period:
Income taxes $22,679 $18,311
Interest 27,557 19,509
Noncash investing and financing activities during the period:
Issuance of common stock warrant $ 5,789 $ -
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7
9. In the current quarter, the board of directors declared cash dividends of
$0.09 per common share, compared to $0.08 per common share in the first
quarter of 1999.
10. Basic (loss) income per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares and common shares obtainable upon the exchange of the exchangeable
shares of Mattel's Canadian subsidiary, Softkey Software Products Inc.,
outstanding during each period. Earnings available to common stockholders
represent reported net (loss) income less preferred stock dividend
requirements.
Diluted (loss) income per common share is computed by dividing diluted
earnings available to common stockholders by the weighted average number of
common shares, common shares obtainable upon the exchange of the
exchangeable shares of Mattel's Canadian subsidiary, Softkey Software
Products Inc., and other common equivalent shares outstanding during each
period. The calculation of common equivalent shares assumes the exercise of
dilutive stock options and warrants, net of assumed treasury share
repurchases at average market prices, and conversion of dilutive preferred
stock and convertible debt, as applicable. Diluted earnings available to
common stockholders represent earnings available to common stockholders
less preferred stock dividend requirements. Diluted earnings per share
presented for the 2000 first quarter is the same as basic earnings per
share due to Mattel's net loss position.
11. The table below presents information about segment revenues, operating
profit and assets. Mattel's reportable segments are separately managed
business units and include toy marketing and toy manufacturing. The Toy
Marketing segment is divided on a geographic basis between domestic and
international. The domestic Toy Marketing segment is further divided into
US Girls, US Boys/Entertainment, US Infant & Preschool, and Other. The US
Girls segment includes brands such as Barbie(R), Polly Pocket(R) and
Cabbage Patch Kids(R). The US Boys/Entertainment segment includes products
in the Wheels and Entertainment categories. The US Infant & Preschool
segment includes Fisher-Price(R), Disney preschool and plush, Power
Wheels(R), Sesame Street(R) and other preschool products. The Other segment
principally sells specialty girls products, including American Girl(R),
which are sold through the direct marketing distribution channel. The
International Toy Marketing segment sells products in all toy categories.
The Toy Manufacturing segment manufactures toy products, which are sold to
the Toy Marketing segments based on intercompany transfer prices. Such
prices are based on manufacturing costs plus a profit margin. Segment
revenues do not include sales adjustments such as trade discounts and other
allowances. However, such adjustments are included in the determination of
segment profit from operations. Segment profit from operations represents
income before interest expense and taxes. The consolidated total profit
from operations presented in the following table represents income before
income taxes as reported in the consolidated statements of operations.
8
The segment assets are comprised of accounts receivable and inventories,
net of applicable reserves and allowances.
(In thousands) March 31, 2000 March 31, 1999
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REVENUES
Toy Marketing:
US Girls $ 170,344 $ 155,005
US Boys/Entertainment 118,280 120,630
US Infant & Preschool 182,997 174,249
Other 48,195 51,517
International 220,234 236,036
Toy Manufacturing 333,761 190,183
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Segment total 1,073,811 927,620
Elimination of intersegment sales (333,761) (190,183)
Sales adjustments (46,789) (49,122)
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Net sales from continuing operations $ 693,261 $ 688,315
===================================================================================================
OPERATING PROFIT (LOSS)
Toy Marketing:
US Girls $ 36,293 $ 29,055
US Boys/Entertainment 867 1,065
US Infant & Preschool 5,818 2,835
Other (14,499) (7,775)
International (17,554) (11,330)
Toy Manufacturing 24,289 12,458
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Segment total 35,214 26,308
Interest expense (24,356) (24,858)
Executive severance and other related charges (53,073) -
Corporate and other (19,429) (18,870)
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Loss from continuing operations
before income taxes $ (61,644) $ (17,420)
===================================================================================================
ASSETS
Toy Marketing:
US Girls & US Boys/Entertainment* $ 483,799 $ 464,236
US Infant & Preschool 272,831 322,357
Other 92,662 75,525
International 482,979 503,576
Toy Manufacturing 93,931 79,006
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Segment total 1,426,202 1,444,700
Corporate and other (6,707) (26,842)
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Accounts receivable and inventories from
continuing operations $1,419,495 $1,417,858
===================================================================================================
* Asset information is not maintained by individual segment.
9
12. In January 2000, Mattel and Warner Bros. Worldwide Consumer Products signed
a licensing agreement making Mattel the worldwide master toy licensee for
the literary characters from the Harry Potter books published by J.K.
Rowling as well as for feature film and television properties developed by
Warner Bros. Pictures featuring the Harry Potter characters. Mattel's
worldwide toy licensing agreement involves the first two Harry Potter books
and theatrical films. This agreement contains minimum royalty guarantees
and has a term of four years, provided that the second theatrical film is
released prior to January 1, 2003. If the second theatrical film is
released subsequent to January 1, 2003, the agreement will be extended to a
date twelve months after the release of the second theatrical film.
Pursuant to the agreement, Mattel issued Warner Bros. Consumer Products a
stock warrant, valued at $5.8 million, to purchase 3.0 million shares of
Mattel's common stock at an exercise price of $10.875 per share. This
warrant became fully vested and exercisable upon signing of the licensing
agreement and expires on December 31, 2003.
13. During the second quarter of 1999, Mattel initiated a restructuring plan
for its continuing business and incurred certain other nonrecurring
charges. The restructuring plan was aimed at leveraging global resources in
the areas of manufacturing, marketing and distribution, eliminating
duplicative functions worldwide and achieving improved operating
efficiencies. The following are the major restructuring initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of three higher cost manufacturing facilities.
Severance and other compensation costs associated with the restructuring
relate to the termination of approximately 2,950 employees around the
world. Through March 31, 2000 approximately $43 million has been incurred
related to the termination of nearly 2,850 employees, of which
approximately 150 were terminated during the quarter.
10
Components of the accrued restructuring and other nonrecurring costs,
including adjustments related to discontinued operations, are as follows:
Discontinued
Balance Operations Amounts Balance
(In millions) Dec. 31, 1999 Adjustments Incurred March 31, 2000
- -------------------------------------------------------------------------------------------------------------------
Severance and other compensation $ 83 $(29) $(19) $35
Distributor, license and other contract terminations 10 - (4) 6
Lease termination costs 18 (3) (6) 9
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Total restructuring and asset writedowns 111 (32) (29) 50
Merger-related transaction and other costs 5 (1) - 4
Other nonrecurring charges 19 - (2) 17
- -------------------------------------------------------------------------------------------------------------------
Total restructuring, asset writedowns and
other charges $135 $(33) $(31) $71
===================================================================================================================
The discontinued operations adjustments represent the reclassification of the
restructuring accrual related to Learning Company's business. The remaining
accrued restructuring balance for Learning Company has been included in
the net investment in discontinued operations in the consolidated balance
sheets.
The remaining restructuring balance of severance and compensation principally
represents the continued consolidation and streamlining of Mattel's European
operations, which are currently underway, and future cash payments for
employees already terminated. The remaining balance of restructuring costs
largely includes future cash payments on vacated leased spaces and
finalization of distributor terminations. Most of the restructuring actions
will be substantially complete by June 2000; however, future cash outlays will
extend beyond this date largely due to severance payment options available to
affected employees and future lease payments on vacated spaces. Total cash
outlays will be funded from existing cash balances and internally generated
cash from operations.
The nonrecurring charges principally relate to the October 1998 recall of
Mattel's Power Wheels(R) vehicles and environmental remediation costs related
to a manufacturing facility on a leased property in Beaverton, Oregon.
11
Mattel, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
CAUTIONARY STATEMENT
Certain written and oral statements made or incorporated by reference from time
to time by Mattel or its representatives in this Quarterly Report on Form 10-Q,
other filings or reports filed with the Securities and Exchange Commission,
press releases, conferences, or otherwise, are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Mattel is including this Cautionary Statement to make applicable and take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any such forward-looking statements. Forward-looking
statements include any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements, and forward-looking statements can
be identified by the use of terminology such as "believe," "anticipate,"
"expect," "estimate," "may," "will," "should," "project," "continue," "plans,"
"aims," "intends," "likely," or other words or phrases of similar terminology.
Management cautions you that forward-looking statements involve risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. In addition to the risk factors listed in Mattel's
1999 Annual Report of Form 10-K and other important factors detailed herein and
from time to time in other reports filed by Mattel with the Securities and
Exchange Commission, including Forms 8-K, 10-Q and 10-K, the following important
factors could cause actual results to differ materially from those suggested by
any forward-looking statements.
Marketplace Risks
- - Increased competitive pressure, both domestically and internationally, which
may negatively affect the sales of Mattel's products
- - Changes in public and consumer preferences, which may negatively affect
Mattel's toy business
- - Significant changes in the play patterns of children, whereby they are
increasingly attracted to more developmentally advanced products at younger
ages, which may affect brand loyalty and the perceived value of and demand
for Mattel's products
- - Possible weaknesses in economic conditions, both domestically and
internationally, which may negatively affect the sales of Mattel's products
and the costs associated with manufacturing and distributing these products
Financial Considerations
- - Currency fluctuations, which may affect Mattel's reportable income
- - Significant changes in interest rates, both domestically and internationally,
which may negatively affect Mattel's cost of financing both its operations
and investments
- - Reductions in Mattel's credit ratings which may significantly increase the
cost of satisfying Mattel's long-term capital needs
12
Other Risks
- - Mattel's inability to complete the timely sale of its Consumer Software
segment, which may expose Mattel to further material operating losses and
restructuring charges relating to that business
- - Development of new technologies, including the Internet, which may create new
risks to Mattel's ability to protect its intellectual property rights
- - Changes in laws or regulations, both domestically and internationally,
including those affecting the Internet, consumer products, environmental
activities or trade restrictions, which may lead to increased costs or
interruption in normal business operations of Mattel
- - Current and future litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in the normal
business operations of Mattel
- - Labor disputes, which may lead to increased costs or disruption of any of
Mattel's operations
The risks included herein are not exhaustive. Other sections of this Quarterly
Report on Form 10-Q may include additional factors which could materially and
adversely impact Mattel's business, financial condition and results of
operations. Moreover, Mattel operates in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors on Mattel's business,
financial condition or results of operations or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
SUMMARY
Mattel designs, manufactures, and markets a broad variety of family products on
a worldwide basis through both sales to retailers and direct to consumers.
Mattel's business is dependent in great part on its ability each year to
redesign, restyle and extend existing core products and product lines, to design
and develop innovative new products and product lines, and to successfully
market those products and product lines. Mattel plans to continue to focus on
its portfolio of traditional brands which have historically had worldwide
sustainable appeal.
Mattel's portfolio of brands can be grouped in the following categories:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
Fashion Magic(R), Cabbage Patch Kids(R) and Polly Pocket(R)
Boys/Entertainment - including Hot Wheels(R), Matchbox(R), Tyco(R)
Electric Racing and Tyco(R) Radio Control (collectively "Wheels") and
Disney, Nickelodeon(R), games and puzzles
Infant & Preschool - including Fisher-Price(R), Power Wheels(R), Sesame
Strect(R), Disney preschool and plush, Winnie the Pooh(R), See `N
Say(R), Magna Doodle(R), View-Master(R) and Blue's Clues(R)
Direct Marketing - American Girl(R), Barbie(R), Wheels and Fisher-Price(R)
13
Mattel's business is seasonal, and, therefore, results of continuing operations
are comparable only with corresponding periods.
RESULTS OF CONTINUING OPERATIONS
Consolidated Results
Net loss from continuing operations for the first quarter of 2000 was $44.6
million or $0.10 per diluted share as compared to a net loss from continuing
operations of $12.6 million or $0.03 per diluted share in the first quarter of
1999. Profitability in the first quarter of 2000 was negatively impacted by a
$38.4 million or $0.09 per share after-tax charge related to the departure of
certain senior executives. Of the total after-tax charge, $25.0 million
represents cash payments during the quarter for severance and taxes related to
the forgiveness of an executive loan, and noncash charges totaling $13.4 million
related to executive retirement plan charges and the forgiveness of executive
loans.
The following is a percentage analysis of results of continuing operations:
For the
Three Months Ended
-----------------------------
March 31, March 31,
2000 1999
- ---------------------------------------------------------------------------------------------------------------
Net sales 100% 100%
===============================================================================================================
Gross profit 45.3% 45.8%
Advertising and promotion expenses 13.2 13.2
Other selling and administrative expenses 36.6 29.3
Amortization of intangibles 1.8 1.9
Other (income) expense, net (0.9) 0.3
- ---------------------------------------------------------------------------------------------------------------
Operating (loss) income (5.4) 1.1
Interest expense 3.5 3.6
- ---------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes (8.9)% (2.5)%
===============================================================================================================
Net sales from continuing operations in the first quarter of 2000 increased 1%
from last year to $693.3 million. Sales to customers within the US increased 4%
and accounted for 70% of consolidated sales in the first quarter of 2000
compared to 68% in 1999. Sales to customers outside the US decreased 7% from the
year ago quarter. However, before the unfavorable exchange impact, international
sales were relatively flat with last year. Additionally, certain European
markets continue to be effected by retailer adjustments to just-in-time
inventory practices.
Sales in the Girls category increased 1% due to a 7% worldwide increase in
Barbie(R) products. Barbie(R) sales were up 14% in the US, but were down 5%
internationally. However, excluding the unfavorable exchange impact, Barbie(R)
sales were up 1% in international markets. The Girls category also experienced
decreases for other Girls products, including large and small dolls. Sales in
the Infant &
14
Preschool category increased 2%, mainly due to a 17% growth in sales of core
Fisher-Price(R) products, partially offset by declines in sales of Sesame
Street(R), Disney Preschool and Winnie the Pooh(R) products. Sales of Wheels
products decreased 4% due to declines in Matchbox(R) and Tyco(R) Radio Control,
partially offset by an increase in Hot Wheels(R) sales. This category was
impacted by Mattel's decision to manage first quarter shipments of Wheels
product in order to reduce the level of retail inventory that was left in
December as a result of competition from Pokemon(TM). Sales of Entertainment
products increased 14%, driven by the strength of Toy Story 2 and Max Steel(TM)
products. Pleasant Company sales were down 2%. Decreased American Girl(R)
catalogue sales, affected in part by a later Easter, were partially offset by
increased sales at the American Girl(R) Place retail store and Pleasant
Company's publishing division.
Gross profit, as a percentage of net sales, was 45.3% in the first quarter of
2000 compared to 45.8% in 1999. The margin was positively affected by product
mix, but negatively impacted by exchange translations and higher shipping costs.
Advertising and promotion, as a percentage of net sales, was 13.2% in both the
first quarter of 1999 and 2000. Other selling and administrative expenses,
excluding the one-time severance expense, were 29.0% of net sales in 2000
compared to 29.3% in 1999. Other income, net increased by approximately $9
million due to favorable foreign exchange and investment gains. However, overall
foreign exchange negatively impacted Mattel in the quarter, after considering
the impact on cost of goods sold and the translation of foreign sales and
earnings. Interest expense was $24.4 million compared with $24.9 million in the
1999 quarter. Mattel's first quarter tax rate was 27.6%, consistent with full
year expectations.
Business Segment Results
Mattel's reportable segments are separately managed business units and include
toy marketing and toy manufacturing. The Toy Marketing segment is divided on a
geographic basis between domestic and international. The domestic Toy Marketing
segment is further divided into US Girls, US Boys/Entertainment, US Infant &
Preschool and Other. The US Girls segment includes products such as Barbie(R),
Polly Pocket(R) and Cabbage Patch Kids(R). The US Boys/Entertainment segment
includes products in the Wheels and Entertainment categories. The US Infant &
Preschool segment includes Fisher-Price(R), Disney preschool and plush, Power
Wheels(R), Sesame Street(R) and other preschool products. The Other segment
principally sells girls specialty products, including American Girl(R), which
are sold through the direct marketing distribution channel. The International
Toy Marketing segment sells products in all toy categories.
The US Girls segment sales increased by 10% in 2000 compared to 1999 due to a
14% increase in sales of Barbie(R) product. Within the Barbie(R) product line,
Mattel has employed strategies including targeting product for specific age
groups, creating a new logo and package design, and supporting retailer demand
for product in terms of earlier shipments and product offerings. The
15
US Boys/Entertainment segment sales decreased 2% due to a 7% decrease in sales
of Wheels products, partially offset by a 22% increase in sales of Entertainment
products. The decrease in the Wheels business was largely driven by Mattel's
decision to manage first quarter shipments of Wheels product in order to reduce
the level of retail inventory that was left in December as a result of
competition from Pokemon(TM). The increase in Entertainment product sales was
largely due to introduction of Max Steel(TM) and increased sales of Toy Story 2
product. The US Infant & Preschool segment sales increased 5% largely due to
increased sales of core Fisher-Price(R) and Power Wheels(R) products, partially
offset by declines in sales of Sesame Street(R), Disney Preschool and Winnie the
Pooh(R) products.
Sales in the Other segment decreased by 6%, including a 2% decline in Pleasant
Company sales. Decreased American Girl(R) catalogue sales, affected in part by a
later Easter, were partially offset by increased sales at the American Girl
Place(R) retail store and for Pleasant Company's publishing division. The
International Toy Marketing segment sales decreased by 7%, or relatively flat
with last year before the unfavorable foreign exchange impact. In local
currency, Barbie(R) sales were up 1%, Wheels sales increased 7% and
Entertainment products grew 12%. Additionally, the International markets
experienced decreases in sales of other Girls products, including large and
small dolls. Sales in the Toy Manufacturing segment grew 75% largely due to
increased orders by the Toy Marketing segments for all products.
Operating profit in the US Girls segment increased by 25%, largely due to
increased sales of higher margin Barbie(R) products. Operating profit in the US
Boys/Entertainment segment decreased by 19% principally due to lower volume.
Operating profit in the US Infant & Preschool segment more than doubled largely
due to increased sales of relatively higher margin core Fisher-Price(R)
products. Operating profit in the Other segment decreased by 86% largely due to
lower sales of American Girl(R) products and increased advertising costs to
support a broader catalogue distribution. The International Toy Marketing
segment operating profit declined 55% largely due to unfavorable foreign
exchange impact. Toy Manufacturing segment profit nearly doubled largely due to
increased production in the first quarter.
16
DISCONTINUED OPERATIONS
On March 31, 2000, Mattel's board of directors resolved to sell its Consumer
Software segment, which is comprised primarily of the assets of Learning
Company. As a result of this decision, the Consumer Software segment is being
reported as a discontinued operation effective March 31, 2000, and the
consolidated financial statements have been reclassified to segregate the net
investment in and operating results of the Consumer Software segment. Mattel
expects to sell the Consumer Software segment by the end of 2000 and expects to
record a gain for accounting purposes upon disposal. Net sales of the Consumer
Software segment were $64.4 million and $190.6 million for the three months
ended March 31, 2000 and 1999, respectively.
FINANCIAL POSITION
Mattel's cash position as of March 31, 2000 was $214.9 million, higher than the
$50.2 million as of the first quarter 1999 but lower than the $247.4 million at
year end 1999. Accounts receivable, net increased by $41.3 million from the year
ago quarter and decreased $104.8 million from year-end. Inventory balances
decreased $39.7 million from the 1999 quarter end as a result of tighter
inventory control. Since year end, inventory increased $86.0 million as a result
of routine inventory buildup to support sales later in the year. Prepaid
expenses decreased $93.5 million compared to first quarter 1999 and increased
$30.5 million compared to year end 1999 due to changes in prepaid income taxes.
Property, plant and equipment, net decreased $39.9 million from the first
quarter of 1999 due to the closure of manufacturing facilities and asset
writedowns taken as part of restructuring activities. Intangibles, net decreased
$56.2 million compared to the year-ago quarter due to amortization. Other assets
increased $330.2 million from the first quarter of 1999 and $108.0 million
compared to year end 1999, principally due to higher deferred income taxes.
17
Short-term borrowings increased $589.3 million compared to the 1999 quarter end
due to increased commercial paper issuances and other short-term borrowings to
fund Mattel's seasonal financing needs and to fund Learning Company's cash
requirements. Compared to 1999 year end, short-term borrowings increased $479.1
million to support seasonal working capital financing needs. Current portion of
long-term liabilities decreased $30.6 million over the 1999 quarter end,
primarily due to the payment of $30.0 million of Medium-Term notes. Seasonal
financing needs for the next twelve months for both continuing and discontinued
operations are expected to be satisfied through internally generated cash,
issuance of commercial paper, and use of Mattel's various short-term bank lines
of credit. On March 31, 2000, Mattel implemented a new 364 day, $400.0 million
credit facility, with essentially the same terms and conditions as the existing
$1.0 billion revolving credit facility which will be used to help satisfy
seasonal financing needs.
A summary of Mattel's capitalization is as follows:
(In millions, except percentage
information) March 31, 2000 March 31, 1999 Dec. 31, 1999
- ----------------------------------------------------------------------------------------
Medium-term notes $ 540.5 19% $ 540.5 17% $ 540.5 17%
Senior notes 400.0 14 400.0 12 400.0 13
Other long-term debt obligations 42.2 1 42.8 1 42.4 2
- ----------------------------------------------------------------------------------------
Total long-term debt 982.7 34 983.3 30 982.9 32
Other long-term liabilities 172.5 6 149.0 5 163.0 5
Stockholders' equity 1,744.5 60 2,127.1 65 1,962.6 63
- ----------------------------------------------------------------------------------------
$2,899.7 100% $3,259.4 100% $3,108.5 100%
=========================================================================================
Total long-term debt remained approximately the same as first quarter 2000 and
year end 1999. Although $100.0 million of the senior notes are maturing in 2000,
they have been classified as long-term in the consolidated balance sheets at
March 31, 2000 and December 31, 1999 since management has the ability and intent
to repay these obligations upon maturity with proceeds from the issuance of
other long-term debt instruments. Despite the recent rating agency downgrades of
Mattel's long-term debt, Mattel's long-term debt rating continues to be
investment grade and the downgrades are not expected to impact Mattel's ability
to access the capital markets to implement the refinancing. However, the rating
agency downgrades will have a negative impact on the pricing spread over the
Treasury rates and could cause Mattel to pay a slightly higher interest rate on
the issued debt than it otherwise would have paid. Mattel expects to satisfy its
future long-term capital needs through the retention of corporate earnings and
the issuance of long-term debt instruments. As of March 31, 2000, Mattel has up
to $400.0 million of debt and equity securities available for issuance under its
current shelf registration statement. Other long-term liabilities increased
$23.5 million compared to first quarter 1999 due to increases in employee
benefit plan liabilities. Stockholders' equity decreased $382.6 million since
March 31, 1999, primarily as a result of operating losses, common and preferred
dividends declared, and treasury stock purchases, partially offset by the
reissuance of treasury stock for the exercise of nonqualified stock options by
Mattel's employees. Stockholder's equity declined
18
$218.1 million from year end 1999 as a result of the first quarter operating
loss, common dividends declared, and the unfavorable effect of foreign currency
translation.
RESTRUCTURING AND OTHER CHARGES FROM CONTINUING OPERATIONS
During the second quarter of 1999, Mattel initiated a restructuring plan for its
continuing business and incurred certain other nonrecurring charges. The
restructuring plan was aimed at leveraging global resources in the areas of
manufacturing, marketing and distribution, eliminating duplicative functions
worldwide and achieving improved operating efficiencies. The plan, which was
designed to reduce product costs and overhead spending, resulted in actual cost
savings of approximately $35 million in 1999. Mattel expects savings of
approximately $90 million in 2000.
The following are the major restructuring initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of three higher cost manufacturing facilities.
Severance and other compensation costs associated with the restructuring relate
to the termination of approximately 2,950 employees around the world. Through
March 31, 2000 approximately $43 million has been incurred related to the
termination of nearly 2,850 employees, of which approximately 150 were
terminated during the quarter.
Components of the accrued restructuring and other nonrecurring costs, including
adjustments related to the discontinued operations, are as follows:
Discontinued
Balance Operations Amounts Balance
(In millions) Dec. 31, 1999 Adjustments Incurred March 31, 2000
- -----------------------------------------------------------------------------------------------------------------
Severance and other compensation $ 83 $(29) $(19) $35
Distributor, license and other contract terminations 10 - (4) 6
Lease termination costs 18 (3) (6) 9
- -----------------------------------------------------------------------------------------------------------------
Total restructuring and asset writedowns 111 (32) (29) 50
Merger-related transaction and other costs 5 (1) - 4
Other nonrecurring charges 19 - (2) 17
- -----------------------------------------------------------------------------------------------------------------
Total restructuring, asset writedowns and
other charges $135 $(33) $(31) $71
=================================================================================================================
19
The discontinued operations adjustments represent the reclassification of the
restructuring accrual related to Learning Company's business. The remaining
accrued restructuring balance for Learning Company has been included in the
net investment in discontinued operations in the consolidated balance sheets.
The remaining restructuring balance of severance and compensation principally
represents the continued consolidation and streamlining of Mattel's European
operations, which are currently underway, and future cash payments for employees
already terminated. The remaining balance of restructuring costs largely
includes future cash payments on vacated leased spaces and finalization of
distributor terminations. Most of the restructuring actions will be
substantially complete by June 2000; however, future cash outlays will extend
beyond this date largely due to severance payment options available to affected
employees and future lease payments on vacated spaces. Total cash outlays will
be funded from existing cash balances and internally generated cash from
operations.
The nonrecurring charges principally relate to the October 1998 recall of
Mattel's Power Wheels(R) vehicles and environmental remediation costs related to
a manufacturing facility on a leased property in Beaverton, Oregon.
FOREIGN CURRENCY RISK
Mattel's results of operations and cash flows can be impacted by exchange rate
fluctuations. To limit the exposure associated with exchange rate movements,
Mattel enters into foreign currency forward exchange and option contracts
primarily to hedge its purchase of inventory, sales and other intercompany
transactions denominated in foreign currencies. Mattel's results of operations
can also be affected by the translation of foreign revenues and earnings into US
dollars.
Market risk exposures exist with respect to the settlement of foreign currency
transactions during the year because currency fluctuations cannot be predicted
with certainty. Mattel seeks to mitigate its exposure to market risk by
monitoring its currency exchange exposure for the year and partially or fully
hedging such exposure. In addition, Mattel manages its exposure through the
selection of currencies used for foreign borrowings and intercompany invoicing.
Mattel does not trade in financial instruments for speculative purposes.
20
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Greenwald Litigation and Related Matters
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025 008)
against Mattel in Superior Court of the State of California, County of Los
Angeles. Ms. Greenwald is a former employee whom Mattel terminated in July 1995.
Her complaint sought $50 million in general and special damages, plus punitive
damages, for breach of oral, written and implied contract, wrongful termination
in violation of public policy and violation of California Labor Code Section
970. Ms. Greenwald claimed that her termination resulted from complaints she
made to management concerning general allegations that Mattel did not account
properly for sales and certain costs associated with sales and more specific
allegations that Mattel failed to account properly for certain royalty
obligations to The Walt Disney Company.
On December 5, 1996, Mattel's motion for summary adjudication of Ms. Greenwald's
public policy claim was granted. On March 7, 1997, Mattel filed a motion for
summary judgment on the remaining causes of action. On December 9, 1997,
Mattel's motion for summary judgment of Ms. Greenwald's remaining claims was
granted. On February 4, 1998, Ms. Greenwald appealed from the dismissal of her
suit.
On March 27, 2000, the California Court of Appeal filed an opinion which
affirmed in part and reversed in part the judgment in favor of Mattel. The Court
of Appeal ruled that disputed factual issues exist which preclude summary
adjudication of certain claims and that such factual issues must be resolved by
a jury at trial. As a consequence, Ms. Greenwald's claims for termination in
violation of public policy, termination in breach of an implied agreement, and
violation of Labor Code Section 970 were ordered remanded to the trial court for
further proceedings. The Court of Appeal did not rule on whether Ms. Greenwald's
claims have substantive merit; it merely held that the claims should be
presented to a jury.
Mattel intends to file a petition requesting the California Supreme Court to
review the case and affirm the trial court's judgment. If that petition is not
successful, Mattel intends to continue to defend the action vigorously.
21
Litigation Related to Business Combination
On December 16, 21, and 23, 1998, several stockholders of the legal entity The
Learning Company, Inc. that merged into Mattel ("Old Learning Company") filed
six separate purported class action complaints in the Court of Chancery of the
State of Delaware in and for New Castle County against Old Learning Company and
Old Learning Company's board of directors for alleged breaches of fiduciary
duties in connection with the May 1999 merger. The six complaints were
consolidated. The consolidated complaint named Mattel as an additional
defendant, claiming that Mattel aided and abetted the alleged breaches of
fiduciary duty. On March 9, 2000, the plaintiffs filed a notice and order of
dismissal dismissing the action without prejudice. On March 13, 2000, the
Court formally dismissed the action by entering the order.
Litigation Related to Learning Company Earnings Shortfall
Following Mattel's announcement on October 4, 1999 that it expected an earnings
shortfall at its Learning Company division in the third quarter of 1999, several
of Mattel's stockholders filed purported class action complaints naming Mattel
and certain of its present and former officers and directors as defendants. The
complaints generally allege, among other things, that the defendants made false
or misleading statements that artificially inflated the price of Mattel's common
stock by overstating the revenues and net income of Mattel, and its Learning
Company division, and by falsely representing that the May 1999 acquisition of
Learning Company would be immediately accretive to Mattel's 1999 and 2000
financial results.
Two additional purported class action complaints have been brought against
Mattel as successor to Learning Company and the former directors of Learning
Company on behalf of former stockholders of Broderbund Software, Inc.
("Broderbund") who acquired shares of Learning Company in exchange for their
Broderbund common stock in connection with the Learning Company-Broderbund
merger on August 31, 1998. The complaints in those actions generally allege that
Learning Company misstated its financial results prior to the time it was
acquired by Mattel. The purported class actions brought on behalf of Mattel and
Broderbund stockholders are all currently pending in the United States District
Court for the Central District of California.
On October 25, 1999, a Mattel stockholder filed a derivative complaint on behalf
and for the benefit of Mattel in the Superior Court of the State of California,
County of Los Angeles. The complaint alleges that Mattel's directors breached
their fiduciary duties, wasted corporate assets and grossly mismanaged Mattel in
connection with Mattel's acquisition of Learning Company and seeks both monetary
and injunctive relief. On February 10, 2000, the Court dismissed the complaint
with leave to amend. On March 10, 2000, Mattel and the other defendants entered
into a stipulation with the plaintiff staying the action.
22
On March 17, 2000, a Mattel stockholder filed a second derivative complaint on
behalf and for the benefit of Mattel in the Superior Court of the State of
California, County of Los Angeles. On March 27, 2000, a Mattel stockholder filed
a third derivative complaint on behalf and for the benefit of Mattel in the
Court of Chancery of the State of Delaware in and for New Castle County. Both
complaints generally allege that Mattel's directors breached their fiduciary
duties and grossly mismanaged Mattel in connection with Mattel's acquisition of
Learning Company. The complaints seek both monetary and injunctive relief.
Mattel believes the purported class actions and derivative suits are without
merit and intends to defend them vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
3.0 By-laws of Mattel, as amended to date
11.0 Computation of Income (Loss) per Common and Common Equivalent Share
12.0 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividends
27.0 Financial Data Schedule (EDGAR filing only)
99.0 Amendment No. 4 to Mattel, Inc. 1990 Stock Option Plan
99.1 Amendment No. 3 to Amended and Restated Mattel 1996 Stock Option
Plan
99.2 Amendment No. 1 to Mattel 1999 Stock Option Plan
99.3 Separation Agreement between Mattel and Jill E. Barad dated
February 25, 2000
99.4 Severance and Consulting Agreement between Mattel and Ned Mansour
99.5 Mattel, Inc. Credit Agreement (364-Day Facility) dated as of
March 31, 2000
99.6 Fifth Amendment to Second Amended and Restated Credit Agreement
dated as of March 31, 2000
99.7 First Amendment to Receivables Purchase Agreement dated as of
March 31, 2000
(b) Reports on Form 8-K
-------------------
Mattel filed the following Current Reports on Form 8-K during the
quarterly period ended March 31, 2000:
Date of Report Items Reported Financial Statements Filed
- ----------------------------------------------------------------------------------------------------------------
January 6, 2000 5,7 None
February 11, 2000 5,7 None
23
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTEL, INC.
---------------------------
(Registrant)
Date: As of May 3, 2000 By: /s/ Kevin M. Farr
----------------- ---------------------------
Kevin M. Farr
Chief Financial Officer
24