EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Mattel, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Mattel, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of Mattel's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 2, 2000 (except for Note 12 which is as of March 31, 2000)
II-1
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
------------ ------------
(In thousands of USD)
ASSETS
Current Assets
Cash and short-term investments.................... $ 247,354 $ 212,454
Accounts receivable, less allowances of U.S.$29.5
million at December 31, 1999 and U.S.$41.2 million
at December 31, 1998.............................. 1,001,972 983,050
Inventories........................................ 436,316 584,358
Prepaid expenses and other current assets.......... 166,217 277,948
---------- ----------
Total current assets............................. 1,851,859 2,057,810
---------- ----------
Property, Plant and Equipment
Land............................................... 34,882 35,113
Buildings.......................................... 270,185 271,580
Machinery and equipment............................ 552,625 512,225
Capitalized leases................................. 23,271 23,271
Leasehold improvements............................. 74,812 82,643
---------- ----------
955,775 924,832
Less: accumulated depreciation..................... 422,142 375,724
---------- ----------
533,633 549,108
Tools, dies and molds, net......................... 191,158 187,349
---------- ----------
Property, plant and equipment, net................. 724,791 736,457
---------- ----------
Other Noncurrent Assets
Intangibles, net................................... 1,200,622 1,264,462
Net investment in discontinued operations.......... 461,986 350,605
Other assets....................................... 434,706 203,436
---------- ----------
$4,673,964 $4,612,770
========== ==========
The accompanying notes are an integral part of these statements.
Consolidated results for 1998 have been restated retroactively for the
effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 12.
II-2
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(Continued)
December 31, December 31,
1999 1998
------------ ------------
(In thousands of USD,
except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings.............................. $ 369,549 $ 134,006
Current portion of long-term liabilities........... 3,173 33,518
Accounts payable................................... 293,277 293,421
Accrued liabilities................................ 714,633 651,013
Income taxes payable............................... 184,789 205,253
---------- ----------
Total current liabilities........................ 1,565,421 1,317,211
---------- ----------
Long-Term Liabilities
6 3/4% senior notes, due 2000...................... 100,000 100,000
6% senior notes, due 2003.......................... 150,000 150,000
6 1/8% senior notes, due 2005...................... 150,000 150,000
Medium-term notes.................................. 540,500 540,500
Mortgage note...................................... 42,380 43,007
Other.............................................. 162,976 141,249
---------- ----------
Total long-term liabilities...................... 1,145,856 1,124,756
---------- ----------
Stockholders' Equity
Preferred stock, Series A U.S.$0.01 par value,
U.S.$200.00 liquidation preference per share,
750.0 thousand shares authorized, issued and
outstanding at December 31, 1998.................. -- 8
Preferred stock, Series C U.S.$1.00 par value,
U.S.$125.00 liquidation preference per share,
772.8 thousand shares authorized; 771.9 thousand
shares issued and outstanding at December 31,
1998.............................................. -- 772
Special voting preferred stock U.S.$1.00 par value,
U.S.$10.00 liquidation preference per share, one
share authorized, issued and outstanding,
representing the voting rights of 3.2 million and
5.2 million outstanding exchangeable shares at
December 31, 1999 and 1998, respectively.......... -- --
Common stock U.S.$1.00 par value, 1.0 billion
shares authorized;
433.6 million shares and 405.1 million shares
issued in 1999 and 1998, respectively............. 433,563 405,114
Additional paid-in capital......................... 1,728,954 1,845,222
Deferred compensation.............................. -- (12,265)
Treasury stock at cost; 12.0 million shares and
14.3 million shares in 1999 and 1998,
respectively...................................... (361,825) (495,347)
Retained earnings.................................. 401,642 625,197
Accumulated other comprehensive loss............... (239,647) (197,898)
---------- ----------
Total stockholders' equity....................... 1,962,687 2,170,803
---------- ----------
$4,673,964 $4,612,770
========== ==========
Commitments and Contingencies (See accompanying
notes.)
The accompanying notes are an integral part of these statements.
Consolidated results for 1998 have been restated retroactively for the
effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 12.
II-3
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands of USD, except
per share amounts)
Net Sales................................. $4,595,490 $4,698,337 $4,778,663
Cost of sales............................. 2,413,469 2,388,542 2,414,578
---------- ---------- ----------
Gross Profit.............................. 2,182,021 2,309,795 2,364,085
Advertising and promotion expenses........ 684,519 786,396 760,750
Other selling and administrative
expenses................................. 867,955 862,543 779,777
Restructuring and other charges........... 281,107 44,000 275,000
Amortization of intangibles............... 52,010 41,329 32,179
Interest expense.......................... 131,609 110,833 90,130
Other (income) expense, net............... (5,343) 5,248 1,167
---------- ---------- ----------
Income From Continuing Operations Before
Income Taxes and Extraordinary Item 170,164 459,446 425,082
Provision for income taxes................ 61,777 131,193 135,288
---------- ---------- ----------
Income From Continuing Operations Before
Extraordinary Item 108,387 328,253 289,794
Discontinued Operations (See Note 12)
Loss from discontinued operations......... (190,760) (122,200) (467,905)
---------- ---------- ----------
Income (Loss) Before Extraordinary Item (82,373) 206,053 (178,111)
Extraordinary item--loss on early
retirement of debt....................... -- -- (4,610)
---------- ---------- ----------
Net Income (Loss)......................... (82,373) 206,053 (182,721)
Preferred stock dividend requirements..... 3,980 7,960 10,505
---------- ---------- ----------
Net Income (Loss) Applicable to Common
Shares................................... $ (86,353) $ 198,093 $ (193,226)
========== ========== ==========
Basic Income (Loss) Per Common Share......
Income from continuing operations before
extraordinary item....................... $ 0.25 $ 0.82 $ 0.76
Loss from discontinued operations......... (0.46) (0.31) (1.27)
Extraordinary item--loss on early
retirement of debt....................... -- -- (0.01)
---------- ---------- ----------
Net income (loss)......................... $ (0.21) $ 0.51 $ (0.52)
========== ========== ==========
Weighted average number of common shares.. 414,186 390,210 369,870
========== ========== ==========
Diluted Income (Loss) Per Common Share....
Income from continuing operations before
extraordinary item....................... $ 0.25 $ 0.76 $ 0.74
Loss from discontinued operations......... (0.45) (0.29) (1.24)
Extraordinary item--loss on early
retirement of debt....................... -- -- (0.01)
---------- ---------- ----------
Net income (loss)......................... $ (0.20) $ 0.47 $ (0.51)
========== ========== ==========
Weighted average number of common and
common equivalent shares 425,281 421,707 378,727
========== ========== ==========
Dividends Declared Per Common Share....... $ 0.35 $ 0.31 $ 0.27
========== ========== ==========
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 12.
Consolidated results for 1997 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
II-4
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year
---------------------------------
1999 1998 1997
--------- ----------- ---------
(In thousands of USD)
Cash Flows From Operating Activities:
Net income (loss) ......................... $ (82,373) $ 206,053 $(182,721)
Deduct: loss from discontinued operations.. (190,760) (122,200) (467,905)
loss on early retirement of debt, net
of tax................................. -- -- (4,610)
--------- ----------- ---------
Income from continuing operations.......... 108,387 328,253 289,794
Adjustments to reconcile income from
continuing operations to net cash flows
from operating activities:
Noncash restructuring and integration
charges.................................. 46,374 -- 90,382
Depreciation.............................. 187,455 169,116 154,994
Amortization.............................. 58,555 45,189 34,917
Increase (decrease) from changes in assets
and liabilities:
Accounts receivable...................... (125,891) 140,248 (201,909)
Inventories.............................. 118,703 (47,715) (33,012)
Prepaid expenses and other current
assets.................................. (23,707) (16,295) (75,810)
Accounts payable, accrued liabilities and
income taxes payable.................... 59,128 (79,254) 161,640
Deferred income taxes.................... (7,151) (999) 64,015
Other, net............................... (6,390) 8,958 (3,157)
--------- ----------- ---------
Net cash flows from operating activities of
continuing operations..................... 415,463 547,501 481,854
--------- ----------- ---------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds......... (107,017) (114,387) (96,006)
Purchases of other property, plant and
equipment................................. (94,158) (161,860) (125,567)
Payment for acquisitions, net of cash
acquired.................................. (1,091) (782,588) (8,625)
Proceeds from sale of business and other
property, plant and equipment............. 10,033 18,667 31,484
Investment in other long-term assets....... (48,398) (10,783) (7,816)
Other, net................................. (612) (1,484) 566
--------- ----------- ---------
Net cash flows used for investing
activities of continuing operations....... (241,243) (1,052,435) (205,964)
--------- ----------- ---------
Cash Flows From Financing Activities:
Short-term borrowings, net................. 244,595 109,110 (6,957)
Proceeds from issuance of notes............ -- 350,000 310,000
Payments of long-term debt................. (30,254) (99,310) (234,823)
Exercise of stock options including related
tax benefit............................... 66,207 114,656 59,677
Purchase of treasury stock................. (75,507) (351,093) (227,932)
Sale of treasury stock..................... -- -- 71,248
Payment of dividends on common and
preferred stock........................... (125,673) (97,970) (84,537)
Other, net................................. (572) (1,050) (2,904)
--------- ----------- ---------
Net cash flows from (used) for financing
activities of continuing operations....... 78,796 24,343 (116,228)
--------- ----------- ---------
Net Cash Used for Discontinued Operations.. (215,261) -- --
Effect of Exchange Rate Changes on Cash.... (2,855) (1,902) (14,986)
--------- ----------- ---------
Increase (Decrease) in Cash and Short-term
Investments............................... 34,900 (482,493) 144,676
Cash and Short-term Investments at
Beginning of Year......................... 212,454 694,947 550,271
--------- ----------- ---------
Cash and Short-term Investments at End of
Year...................................... $ 247,354 $ 212,454 $ 694,947
========= =========== =========
The accompanying notes are an integral part of these statements
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 12.
Consolidated results for 1997 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
II-5
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Preferred Common Paid-In Treasury Deferred Retained Comprehensive Stockholders'
Stock Stock Capital Stock Compensation Earnings Income (Loss) Equity
--------- -------- ---------- --------- ------------ --------- ------------- -------------
(In thousands of USD)
Balance, December 31,
1996.................... $ 827 $369,190 $1,233,753 $(215,999) $ $ 820,024 $ (98,008) $2,109,787
Comprehensive (loss):
Net (loss)............. (182,721) (182,721)
Unrealized gain on
securities............. 719 719
Currency translation
adjustments............ (113,177) (113,177)
--------- --------- ----------
Comprehensive (loss).... (182,721) (112,458) (295,179)
Net income of Broderbund
for the three months
ended November 30, 1996
not included in results
of operations........... 8,895 8,895
Purchase of treasury
stock................... (480) (14,094) (227,932) (242,506)
Issuance of treasury
stock................... (45,486) 158,511 113,025
Exercise of stock
options................. 2,135 36,655 38,790
Shares issued for
acquisitions............ 4,362 13,591 (6,193) 11,760
Issuance of Series A
Preferred Stock......... 8 202,025 202,033
Issuance of Softkey
warrants................ 57,462 57,462
Conversion of 7% Notes.. 893 15,141 16,034
Conversion of preferred
stock................... (55) 2,761 (2,706) --
Conversion of
exchangeable shares..... 88 (88) --
Shares issued under
employee stock purchase
plan.................... 62 1,208 1,270
Dividends declared on
common stock............ (77,528) (77,528)
Dividends declared on
preferred stock......... (10,505) (10,505)
----- -------- ---------- --------- -------- --------- --------- ----------
Balance, December 31,
1997.................... 780 379,011 1,497,461 (285,420) -- 551,972 (210,466) 1,933,338
Comprehensive income:
Net income............. 206,053 206,053
Unrealized gain on
securities............. 10,249 10,249
Currency translation
adjustments............ 2,319 2,319
--------- --------- ----------
Comprehensive income.... 206,053 12,568 218,621
Net income of Broderbund
for the month ended
December 31, 1997 not
included in results of
operations.............. 209 209
Purchase of treasury
stock................... (351,393) (351,393)
Issuance of treasury
stock................... (65,210) 141,466 76,256
Exercise of stock
options................. 4,682 76,749 81,431
Shares issued for
acquisitions............ 5,503 111,011 (34,646) 81,868
Issuance of Softkey
warrants................ 134,346 134,346
Conversion of
exchangeable shares..... 10,900 (10,900) --
Conversion of 5 1/2%
Notes................... 4,122 88,880 93,002
Issuance of nonvested
stock................... 840 12,071 (12,265) 646
Shares issued under
employee stock purchase
plan.................... 56 814 870
Dividends declared on
common stock............ (90,431) (90,431)
Dividends declared on
preferred stock......... (7,960) (7,960)
----- -------- ---------- --------- -------- --------- --------- ----------
Balance, December 31,
1998.................... $ 780 $405,114 $1,845,222 $(495,347) $(12,265) $ 625,197 $(197,898) $2,170,803
II-6
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
Accumulated
Additional Other Total
Preferred Common Paid-In Treasury Deferred Retained Comprehensive Stockholders'
Stock Stock Capital Stock Compensation Earnings Income (Loss) Equity
--------- -------- ---------- --------- ------------ --------- ------------- -------------
(In thousands of USD)
Balance, December 31,
1998.................... $ 780 $405,114 $1,845,222 $(495,347) $(12,265) $ 625,197 $(197,898) $2,170,803
Comprehensive (loss):
Net (loss)............. (82,373) (82,373)
Unrealized gain on
securities:
Unrealized holding
gains................ 3,184 3,184
Less:
reclassification
adjustment for
realized gains
included in net
(loss)............... (11,143) (11,143)
Currency translation
adjustments............. (33,790) (33,790)
--------- --------- ----------
Comprehensive (loss).... (82,373) (41,749) (124,122)
Conversion of Series A
Preferred Stock......... (8) 18,000 (17,992) --
Redemption of Series C
Preferred Stock......... (772) 6,382 (51,834) 46,224 --
Purchase of treasury
stock................... (75,507) (75,507)
Issuance of treasury
stock................... (87,300) 134,977 47,677
Exercise of stock
options................. 1,447 28,018 29,465
Shares issued for
acquisitions............ 241 5,306 5,547
Conversion of
exchangeable shares..... 2,342 (2,342) --
Shares issued under
employee stock purchase
plan.................... 37 719 756
Tax adjustment related
to 1987 quasi-
reorganization.......... 33,400 33,400
Exercise of warrants.... (24,243) 27,828 3,585
Nonvested stock
activity................ 12,265 12,265
Dividends declared on
common stock............ (137,202) (137,202)
Dividends declared on
preferred stock......... (3,980) (3,980)
----- -------- ---------- --------- -------- --------- --------- ----------
Balance, December 31,
1999.................... $ -- $433,563 $1,728,954 $(361,825) $ -- $ 401,642 $(239,647) $1,962,687
===== ======== ========== ========= ======== ========= ========= ==========
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 12.
Consolidated results for December 31, 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.
II-7
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of Mattel. 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
Mattel's ability to exercise influence over operating and financial policies.
Financial data for 1997 reflect the retroactive effect of the merger,
accounted for as a pooling of interests, with Tyco consummated in March 1997
(see Note 7). Financial data for all periods presented reflect the retroactive
effect of the merger, accounted for as a pooling of interests with Learning
Company in May 1999 (see Note 12).
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 other comprehensive income (loss) within stockholders' equity.
Cash and Short-Term Investments
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.
Marketable Securities
Marketable securities, comprised principally of investments in private
and publicly-traded securities, are stated at market value and classified as
securities available-for-sale. Unrealized gains or losses are reported as a
component of other comprehensive income (loss) within stockholders' equity
until realized. Quoted market prices, which approximated cost as of the
balance sheet dates, are reasonable estimates of the portfolio's fair value.
These marketable securities, which had a cost basis of U.S.$2.1 million and
U.S.$2.7 million as of December 31, 1999 and 1998, respectively, are shown in
the consolidated balance sheets as part of net investment in discontinued
operations.
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 40 years for buildings, 3 to
10 years for machinery and equipment, and 10 to 20 years, not to exceed the
lease term, for leasehold improvements. Tools, dies and molds are amortized
using the straight-line method over three years.
II-8
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 cost of
acquired patents and trademarks. Intangible assets are amortized using the
straight-line method over periods ranging from 2 to 40 years. Accumulated
amortization was U.S.$280.2 million and U.S.$228.2 million as of December 31,
1999 and 1998, respectively.
The carrying value of fixed and intangible assets is periodically
reviewed to identify and assess any impairment by evaluating the operating
performance and future undiscounted cash flows of the underlying assets.
Revenue Recognition
Revenue from the sale of toy products is recognized upon shipment.
Accruals for customer discounts and rebates, and defective returns are
recorded as the related revenues are recognized.
Revenue from the sale of software products included in discontinued
operations is recognized upon shipment, provided that no significant
obligations remain outstanding and collection of the receivable is probable.
Costs related to insignificant post shipment obligations are accrued when
revenue is recognized for the sale of the related products. Allowances for
good returns are provided at the time of sale and allowances for price
protection are provided at the time of commitment and are charged against
revenues. The allowances for good returns and doubtful accounts are developed
based on an evaluation of historical and expected sales experience and by
channel of distribution, and are based on information available as of the
reporting date. To the extent the future market, sell-through experience,
customer mix, channels of distribution, product pricing, and general economic
and competitive conditions change, the estimated reserves required for returns
and allowances may also change. Revenues from royalty and licensing
arrangements are recognized as earned based upon performance or product
shipments.
Advertising and Promotion Costs
Costs of media advertising are expensed the first time the advertising
takes place, except for direct-response advertising, which is capitalized and
amortized over its expected period of future benefits. Direct-response
advertising consists primarily of catalogue production and mailing costs that
are generally amortized within three months from the date catalogues are
mailed. Advertising costs associated with customer benefit programs are
accrued as the related revenues are recognized. Costs related to various end-
user coupon rebate programs included in discontinued operations are expensed
at the time sales are made and are estimated based on the expected coupon
redemption rate on a product-by-product basis and are adjusted to actual at
the end of each reporting period.
Software Development Costs
Costs for new software products and enhancements to existing software
products included in discontinued operations are expensed as incurred until
technological feasibility has been established. Once technological feasibility
is established, software development costs are capitalized until the related
product is launched. Capitalized software development costs are amortized on a
product-by-product basis using the straight-line method over the estimated
economic life of the product, which is generally twelve months from when the
product is launched, which approximates the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross
revenues for that product.
II-9
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
Mattel has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Accordingly, no compensation cost has been recognized in the
results of operations for nonqualified stock options granted under Mattel's
plans as such options are granted at not less than the quoted market price of
Mattel's common stock on the date of grant.
Income Taxes
Mattel 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
Share and per share data for all periods presented in these financial
statements reflect the retroactive effects of the May 1999 Learning Company
merger. The 1997 share and per share data presented in these financial
statements reflect the retroactive effects of the March 1997 Tyco merger.
In the 1997 fourth quarter, Mattel adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. Accordingly, data for 1997
have been restated to present basic and diluted income (loss) per common
share.
Basic income (loss) 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 income (loss) less preferred stock dividend
requirements.
Diluted income (loss) 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. Dilutive securities are included in the calculation of weighted
average shares outstanding for those periods in which Mattel has recorded
income from continuing operations.
II-10
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the years ended December 31 follows (in thousands of USD):
1999 1998 1997
----------------- ----------------- -----------------
Earnings Shares Earnings Shares Earnings Shares
-------- ------- -------- ------- -------- -------
Income from continuing
operations............. $108,387 $328,253 $289,794
Less: preferred stock
dividend requirements.. (3,980) (7,960) (10,505)
-------- -------- --------
Earnings available to
common stockholders.... $104,407 414,186 $320,293 390,210 $279,289 369,870
Dilutive securities:
Dilutive stock
options.............. 3,920 8,685 5,665
Warrants.............. 665 4,812 1,165
Convertible debt...... -- -- 479 589
Preferred stock....... 6,510 18,000 1,438
-------- ------- -------- ------- -------- -------
Diluted earnings
available to common
stockholders........... $104,407 425,281 $320,293 421,707 $279,768 378,727
======== ======= ======== ======= ======== =======
Premium price stock options totaling 16.9 million, other nonqualified
stock options totaling 19.3 million, convertible debt, and Series C preferred
stock were excluded from the calculation of diluted earnings per share in 1999
because they were anti-dilutive. Premium price options totaling 18.7 million,
Series C preferred stock and convertible debt were excluded from the
calculation of diluted earnings per share in 1998 because they were anti-
dilutive. Certain convertible debt was excluded from the calculation of
diluted earnings per share in 1997 because it was anti-dilutive.
Foreign Currency Contracts
Mattel 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. Mattel 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 income,
net.
II-11
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Income Taxes
Consolidated pre-tax income (loss) from continuing operations consists of
the following (in thousands of USD):
For the Year
----------------------------
1999 1998 1997
--------- -------- --------
US operations.................................. $(126,675) $ 53,965 $ 70,225
Foreign operations............................. 296,839 405,481 354,857
--------- -------- --------
$ 170,164 $459,446 $425,082
========= ======== ========
The provision for current and deferred income taxes consists of the
following (in thousands of USD):
For the Year
----------------------------
1999 1998 1997
-------- -------- --------
Current
Federal..................................... $ 9,816 $ 40,132 $ 55,056
State....................................... 7,400 5,500 15,745
Foreign..................................... 58,150 98,336 80,395
-------- -------- --------
75,366 143,968 151,196
-------- -------- --------
Deferred
Federal..................................... (30,109) 1,825 (14,283)
State....................................... 3,420 (1,400) 3,640
Foreign..................................... 13,100 (13,200) (7,962)
-------- -------- --------
(13,589) (12,775) (18,605)
-------- -------- --------
Provision including extraordinary item........ 61,777 131,193 132,591
Benefit allocated to extraordinary item....... -- -- 2,697
-------- -------- --------
Total provision for income taxes.............. $ 61,777 $131,193 $135,288
======== ======== ========
II-12
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Mattel's deferred income tax
assets (liabilities) were comprised of the following (in thousands of USD):
As of Year End
-------------------
1999 1998
--------- --------
Operating loss and tax credit carryforwards............ $ 192,162 $ 96,410
Sales allowances and inventory reserves................ 66,854 83,573
Deferred compensation.................................. 39,476 36,123
Excess of tax basis over book basis.................... 18,856 15,825
Restructuring and integration charges.................. 54,942 15,349
Postretirement benefits................................ 12,790 12,842
Other.................................................. 48,371 42,000
--------- --------
Gross deferred income tax assets..................... 433,451 302,122
--------- --------
Excess of book basis over tax basis.................... (4,449) (14,392)
Retirement benefits.................................... (19,933) (15,570)
Deferred intangible assets............................. (31,691) --
Other.................................................. (26,042) (9,159)
--------- --------
Gross deferred income tax liabilities................ (82,115) (39,121)
Deferred income tax asset valuation allowances......... (138,400) (63,654)
--------- --------
Net deferred income tax assets......................... $ 212,936 $199,347
========= ========
Management considered all available evidence and determined that a
valuation allowance of U.S.$138.4 million was required as of December 31, 1999
for certain tax credit and net operating loss carryforwards that would likely
expire prior to their utilization. However, management feels it is more likely
than not that Mattel will generate sufficient taxable income in the
appropriate carryforward periods to realize the benefit of the remaining net
deferred tax assets of U.S.$212.9 million.
Differences between the provision for income taxes at the US federal
statutory income tax rate and the provision in the consolidated statements of
operations were as follows (in thousands of USD):
For the Year
----------------------------
1999 1998 1997
-------- -------- --------
Provision at federal statutory rates........ $ 59,557 $160,806 $148,779
Increase (decrease) resulting from:
Losses without income tax benefit......... 21,170 1,821 1,468
Foreign earnings taxed at different rates,
including withholding taxes.............. (62,488) (44,301) (42,503)
State and local taxes, net of federal
benefit.................................. 6,165 2,665 12,287
Non-deductible restructuring charges...... 25,986 -- 20,150
Other..................................... 11,387 10,202 (4,893)
-------- -------- --------
Total provision for income taxes............ $ 61,777 $131,193 $135,288
======== ======== ========
II-13
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 that Mattel intends to permanently invest and upon which no
deferred US income taxes have been provided is U.S.$1.4 billion at December
31, 1999. The additional US income tax on the unremitted foreign earnings, if
repatriated, would be offset in whole or in part by foreign tax credits.
As of December 31, 1999, Mattel has US net operating loss carryforwards
totaling U.S.$206.0 million and credit carryforwards of U.S.$48.1 million for
federal income tax purposes. The net operating loss carryforwards expire
during the years 2000 to 2019, while U.S.$44.0 million of the tax credits
expire during the years 2000 to 2010 with the remainder having no expiration
date. Utilization of these loss and credit carryforwards are subject to annual
limitations, and Mattel has established a valuation allowance for the
carryforwards which are not expected to be utilized. The goodwill recorded in
connection with Tyco's 1991 acquisition of Matchbox has been reduced by the
tax effect of the portion of the net operating losses which Mattel expects to
utilize.
Certain foreign subsidiaries have net operating loss carryforwards
totaling U.S.$172.1 million (U.S.$92.6 million with no expiration date,
U.S.$77.8 million expiring during the years 2000 to 2004, and U.S.$1.7 million
expiring after 2004).
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 1999, 1998 and 1997, nonqualified stock
options exercised resulted in credits to additional paid-in capital totaling
U.S.$15.0 million, U.S.$38.7 million and U.S.$20.2 million, respectively.
The Internal Revenue Service has completed its examination of the Mattel,
Inc. federal income tax returns through December 31, 1994.
Note 3--Employee Benefits
Mattel and certain of its subsidiaries have retirement plans covering
substantially all employees of these companies. Expense related to these plans
totaled U.S.$18.6 million, U.S.$20.0 million and U.S.$19.0 million in 1999,
1998 and 1997, respectively.
Pension Plans
Mattel provides defined benefit pension plans, which satisfy the
requirements of the Employee Retirement Income Security Act of 1974 ("ERISA").
With the exception of the Fisher-Price Pension Plan, activity related to
Mattel's pension plans, including those of foreign affiliates, was not
significant during any year.
II-14
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net pension income for the Fisher-Price Pension Plan,
based upon a December valuation date for the year ended December 31, 1999 and
an October valuation date for the years ended December 31, 1998 and 1997, are
detailed below (in thousands of USD):
For the Period Ended
----------------------------
1999 1998 1997
-------- -------- --------
Service cost................................. $ 2,829 $ 2,508 $ 2,594
Interest cost................................ 14,655 10,929 10,327
Expected return on plan assets............... (27,237) (18,949) (16,163)
Amortization of:
Unrecognized prior service cost............ 88 108 134
Unrecognized net asset..................... (1,284) (2,569) (2,569)
Plan amendment loss (gain)................... 1,386 1,154 (826)
-------- -------- --------
Net pension income........................... $ (9,563) $ (6,819) $ (6,503)
======== ======== ========
Reconciliation of the funded status of Fisher-Price's domestic pension
plan to the related prepaid asset included in the consolidated balance sheets
is as follows (in thousands of USD):
As of Year End
-----------------
1999 1998
-------- -------
Funded status of the plan................................ $ 65,401 $41,335
Unrecognized net gain.................................... (19,551) (4,438)
Unrecognized prior service cost.......................... 692 1,366
Unrecognized net transition asset........................ -- (1,285)
-------- -------
Prepaid pension asset.................................... $ 46,542 $36,978
======== =======
Reconciliation of the assets and liabilities of Fisher-Price's domestic
pension plan are as follows (in thousands of USD):
As of Year End
------------------
1999 1998
-------- --------
Change in Plan Assets
Plan assets at fair value, beginning of year.......... $197,912 $202,887
Actual return on plan assets.......................... 35,588 2,793
Benefits paid......................................... (10,707) (7,768)
-------- --------
Plan assets at fair value, end of year................ $222,793 $197,912
======== ========
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year....... $156,577 $142,078
Service cost.......................................... 2,829 2,508
Interest cost......................................... 14,655 10,929
Plan amendments....................................... 2,003 1,154
Actuarial (gain) loss................................. (7,965) 7,676
Benefits paid......................................... (10,707) (7,768)
-------- --------
Projected benefit obligation, end of year............. $157,392 $156,577
======== ========
II-15
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Period
-------------------
1999 1998 1997
----- ----- -----
Assumptions
Weighted average discount rate....................... 8.00% 7.50% 7.75%
Rate of future compensation increases................ 4.00% 4.00% 4.00%
Long-term rate of return on plan assets.............. 11.00% 11.00% 11.00%
During 1999, Mattel applied for a determination letter from the Internal
Revenue Service related to its planned conversion of the Fisher-Price Pension
Plan from a career-average plan to a cash balance plan. As of December 31,
1999, the proposed cash balance plan is under review by the Internal Revenue
Service.
Other Retirement Plans
Domestic employees are eligible to participate in 401(k) savings plans
sponsored by Mattel or its subsidiaries, which are defined contribution plans
satisfying ERISA requirements. Mattel also maintains unfunded supplemental
executive retirement plans which are nonqualified defined benefit plans
covering certain key executives. For 1999, 1998 and 1997, the accumulated and
vested benefit obligations and related expenses of these plans were not
significant.
Deferred Compensation and Excess Benefit Plans
Mattel provides a deferred compensation plan which permits certain
officers and key employees to elect to defer portions of their compensation.
The deferred compensation plan, together with certain contributions made by
Mattel and employees to an excess benefit plan, earn various rates of return.
The liability for these plans as of December 31, 1999 and 1998 was U.S.$65.1
million and U.S.$47.8 million, respectively. Mattel's contribution to these
plans and the related administrative expense were not significant to the
results of operations during any year.
Mattel has purchased group trust-owned life insurance contracts designed
to assist in funding these programs. The cash surrender value of these
policies, valued at U.S.$55.7 million and U.S.$40.7 million as of December 31,
1999 and 1998, respectively, are held in an irrevocable rabbi trust which is
included in other assets in the consolidated balance sheets.
Postretirement Benefits
Fisher-Price has an unfunded postretirement health insurance plan
covering certain eligible domestic employees hired prior to January 1, 1993.
Details of the expense for the Fisher-Price plan recognized in the
consolidated statements of operations for the years ended December 31, 1999,
1998 and 1997 are as follows (in thousands of USD):
For the Year
--------------------
1999 1998 1997
------ ------ ------
Service cost.......................................... $ 224 $ 218 $ 284
Interest cost......................................... 2,531 2,416 2,465
------ ------ ------
Net postretirement benefit cost....................... $2,755 $2,634 $2,749
====== ====== ======
II-16
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amounts included in the consolidated balance sheets for this plan are as
follows (in thousands of USD):
As of Year End
----------------
1999 1998
------- -------
Current retirees.......................................... $29,988 $25,140
Fully eligible active employees........................... 3,013 4,222
Other active employees.................................... 4,162 4,239
------- -------
Accumulated postretirement benefit obligation............. 37,163 33,601
Unrecognized net loss..................................... (6,254) (1,716)
------- -------
Accrued postretirement benefit liability.................. $30,909 $31,885
======= =======
Reconciliation of the liabilities of Fisher-Price's postretirement health
insurance plan are as follows (in thousands of USD):
As of Year End
----------------
1999 1998
------- -------
Change in Accumulated Postretirement Benefit Obligation
Accumulated postretirement benefit obligation,
beginning of year.................................... $33,601 $33,315
Service cost.......................................... 224 218
Interest cost......................................... 2,531 2,416
Actuarial loss........................................ 4,538 503
Benefits paid, net of participant contributions....... (3,731) (2,851)
------- -------
Accumulated postretirement benefit obligation, end of
year................................................. $37,163 $33,601
======= =======
The discount rates used in determining the accumulated postretirement
benefit obligation were 8.00% for 1999, 7.50% for 1998 and 7.75% for 1997. For
all participants, the health care cost trend rate for expected claim costs was
assumed to be 5.50% in 1999 and remaining constant thereafter. A one
percentage point increase or decrease in the assumed health care cost trend
rate for each future year would have the following effect on the accumulated
postretirement benefit obligation and the service and interest cost recognized
as of and for the year ended December 31, 1999 (in thousands of USD):
One Percentage
Point
-----------------
Increase Decrease
-------- --------
Accumulated postretirement benefit obligation............ $3,729 $(3,188)
Service and interest cost................................ 284 (239)
Domestic employees of Mattel participate in a contributory postretirement
benefit plan. The ongoing costs and obligations associated with the Mattel,
Inc. plan are not significant to the financial position and results of
operations during any year.
Incentive Awards
In June 1999, the stockholders approved the Amended and Restated Mattel
Long-Term Incentive Plan ("Amended and Restated LTIP"). The Amended and
Restated LTIP is a three-year plan available to certain key executives of
Mattel, Inc. Awards are based upon the financial performance of Mattel over a
three-year period and are paid in the quarter following the end of the three-
year measurement period. No expense was recorded in 1999 for awards under the
Amended and Restated LTIP. Amounts charged to operating expense in 1998 and
1997 under the 1996--1998 LTIP were U.S.$10.8 million and U.S.$13.8 million,
respectively.
II-17
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mattel also has annual incentive compensation plans for officers and key
employees based on Mattel's performance and subject to certain approvals of
the Compensation/Options Committee of the board of directors. No expense was
recorded in 1999 for awards under these plans. For the years ended December
31, 1998 and 1997, U.S.$11.7 million and U.S.$23.2 million, respectively, were
charged to operating expense for awards under these plans. For the year ended
December 31, 1999, U.S.$22.0 million was charged to operating expense related
to a special award. This special broad-based employee award was approved by
Mattel's board of directors and was designed to provide a competitive
compensation level to retain and motivate employees of Mattel.
Prior to the May 1999 merger, Learning Company maintained the 1990 Long-
Term Equity Incentive Plan for certain senior executives. Under this plan, 0.8
million shares of nonvested stock were issued during 1998. The aggregate fair
market value of the nonvested stock was being amortized to compensation
expense over the restriction period. At the time of the 1999 merger, the
nonvested stock became fully vested as a result of change of control
provisions and the remaining unamortized amount of U.S.$11.8 million was
charged to results of continuing operations in 1999.
Prior to the March 1997 merger, Tyco had a Long-Term Incentive Plan for
certain senior executives, under which Tyco awarded Restricted Stock Units
("RSU"). The aggregate fair market value of the RSUs was being amortized to
compensation expense by Tyco over the restriction period. At the time of the
1997 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
U.S.$5.1 million was charged to operating expense.
Note 4--Seasonal Financing and Long-Term Debt
Seasonal Financing
Mattel maintains and periodically amends or replaces an unsecured
committed revolving credit agreement with a commercial bank group that is used
as the primary source of financing the seasonal working capital requirements
of its domestic and certain foreign affiliates. The agreement in effect during
1999 consisted of a committed unsecured facility providing a total of up to
U.S.$1.0 billion in seasonal financing (a five-year facility that expires in
2003). Within the facility, up to U.S.$700.0 million was a standard revolving
credit line available for advances and backup for commercial paper issuances.
Interest was charged at various rates selected by Mattel, ranging from market
commercial paper rates to the bank reference rate. The remaining U.S.$300.0
million was available for nonrecourse purchases of certain trade accounts
receivable of Mattel by the commercial bank group providing the credit line.
The agreement required Mattel to meet financial covenants for consolidated
debt-to-capital and interest coverage and Mattel was in compliance with such
covenants during 1999. This agreement will continue to be in effect during
2000. In addition, Mattel avails itself of uncommitted domestic facilities
provided by certain banks to issue short-term money market loans.
To meet seasonal borrowing requirements of certain foreign affiliates,
Mattel negotiates individual financing arrangements, generally with the same
group of banks that provided credit in the prior year. Foreign credit lines
total approximately U.S.$370 million, a portion of which is used to support
letters of credit. Mattel expects to extend these credit lines throughout 2000
and believes available amounts will be adequate to meet its seasonal financing
requirements. Mattel also enters into agreements with banks of its foreign
affiliates for nonrecourse sales of certain of its foreign subsidiary
receivables.
II-18
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest rates charged on Mattel'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's domestic and foreign credit lines and other short-term
borrowings is summarized as follows (in thousands of USD):
For the Year
--------------------------------
1999 1998 1997
---------- ---------- --------
Balance at end of year
Domestic.............................. $ 293,744 $ 79,175 $ --
Foreign............................... 75,805 54,831 17,468
Maximum amount outstanding
Domestic.............................. $1,207,000 $1,076,600 $558,000
Foreign............................... 117,000 141,000 67,000
Average borrowing
Domestic.............................. $ 573,100 $ 400,800 $178,000
Foreign............................... 40,000 58,000 40,000
Weighted average interest rate on
average borrowing
Domestic (computed daily)............. 5.5% 5.6% 5.7%
Foreign (computed monthly)............ 33.0% 20.3% 11.9%
6 3/4% Senior Notes
In May 1993, Mattel issued U.S.$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, 1999 and 1998, the
bid prices for the 6 3/4% Senior Notes, as provided by one of the
underwriters, were U.S.$999.40 and U.S.$1,014.00, respectively, based on a par
value of U.S.$1,000.00. As of December 31, 1999, the 6 3/4% Senior Notes are
classified in the consolidated balance sheets as a long-term liability because
management has the ability and intent to repay this obligation upon maturity
with proceeds from the issuance of other long-term debt instruments.
5 1/2% Senior Convertible Notes ("5 1/2% Notes")
In October 1995, Learning Company issued U.S.$350.0 million aggregate
principal amount of 5 1/2% Notes maturing November 1, 2000. Interest is
payable semiannually on the first day of May and November. The 5 1/2% Notes
are convertible at the option of the holders into common stock at U.S.$53.00
per share. The terms of the 5 1/2% Notes provide for early redemption at the
option of the issuer, in whole or in part, at any time on or after November 2,
1998 at redemption prices equal to 102.2% of the principal amount reducing
annually to 100% by November 1, 2000. During the years ended December 31, 1998
and 1997, Learning Company repurchased U.S.$6.0 million and U.S.$28.0 million,
respectively, of 5 1/2% Notes. In June 1998, Learning Company repurchased
U.S.$96.7 million of 5 1/2% Notes in exchange for issuance of 4.1 million
shares of common stock. At December 31, 1999 and 1998, the bid prices for the
5 1/2% Notes, as provided by one of the underwriters, were U.S.$980.00 and
U.S.$985.00, respectively, based on a par value of U.S.$1,000.00. As of
December 31, 1999 and 1998, the 5 1/2% Senior Notes are classified in the
consolidated balance sheets in net investment in discontinued operations.
II-19
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mattel assumed Learning Company's obligations related to the 5 1/2% Notes
upon consummation of the May 1999 merger. As a result, the 5 1/2% Notes are
now convertible at the option of the holders into a number of shares of Mattel
common stock determined by dividing the principal amount of the notes to be
converted by the U.S.$53.00 conversion price and multiplying the resulting
number by 1.2.
In December 1995, Tribune Company made an investment in Learning Company
in the form of U.S.$150.0 million aggregate principal amount of 5 1/2% Notes.
These notes were sold by Tribune Company during 1997 in a private transaction
to an investor group prior to the issuance by Learning Company of
750.0 thousand shares of Series A Convertible Participating Preferred Stock
("Series A Preferred Stock") and were surrendered by the investor group for
the shares of the Series A Preferred Stock.
6% and 6 1/8% Senior Notes
In July 1998, Mattel issued U.S.$300.0 million aggregate principal amount
of senior notes, U.S.$150.0 million of which were 6% Senior Notes maturing
July 15, 2003 and U.S.$150.0 million of which were 6 1/8% Senior Notes
maturing July 15, 2005. Interest is payable semiannually on the fifteenth day
of January and July. At December 31, 1999 and 1998, the bid prices for the 6%
and 6 1/8% Senior Notes, as provided by one of the underwriters, were
U.S.$929.20 and U.S.$1,004.40, respectively, for the 6% Senior Notes and
U.S.$884.60 and U.S.$998.65, respectively, for the 6 1/8% Senior Notes, based
on a par value of U.S.$1,000.00.
Medium-Term Notes ("MT Notes")
During the 1994 third quarter, Mattel commenced a program for the
issuance of debt and equity securities under various shelf registration
statements. In November 1998, Mattel filed its current universal shelf
registration statement allowing the issuance of up to U.S.$400.0 million of
debt and equity securities, all of which was available to be issued as of
December 31, 1999. The following is a summary of MT Notes currently
outstanding (in millions of USD, except bid prices):
Bid Price(b)
Maturity -------------------------------------
Year Issued Amount Date Rate(a) 1999 1998
----------- ------ ----------- ---------- ----------------- -------------------
1994.................... $ 50.5 12/01-12/04 8.48%-8.55% $1,008.57-$991.65 $1,052.61-$1,112.70
1995.................... 130.0 04/02-05/07 7.01%-7.65% 937.40- 963.78 1,043.20- 1,051.34
1997.................... 310.0 11/04-07/12 6.70%-7.49% 867.40- 912.10 1,021.59- 1,073.45
1998.................... 50.0 11/13 6.50%-6.61% 777.50- 786.30 990.52- 1,000.85
- --------
(a)Interest is payable semiannually at fixed rates on the fifteenth day of May
and November.
(b)Based on a par value of U.S.$1,000.00.
Mortgage Note
In 1990, Mattel borrowed U.S.$45.0 million under a mortgage agreement
collateralized 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 interest rates currently available for
debt with the same credit rating, similar terms and maturity date, was
approximately U.S.$46 million and U.S.$51 million at December 31, 1999 and
1998, respectively.
7% Convertible Subordinated Notes ("7% Notes")
Upon consummation of the March 1997 merger, Mattel assumed Tyco's
U.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.
II-20
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10 1/8% Senior Subordinated Notes ("10 1/8% Notes")
Upon consummation of the March 1997 merger, Mattel assumed Tyco's
U.S.$126.5 million obligation related to the 10 1/8% Notes. On August 15,
1997, Mattel 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, Mattel
recognized a pre-tax extraordinary loss of U.S.$7.3 million, and a related
income tax benefit of U.S.$2.7 million, as a result of the early retirement.
6 7/8% Senior Notes
Mattel's U.S.$100.0 million of 6 7/8% Senior Notes issued in August 1992
were repaid upon maturity on August 1, 1997.
Scheduled Maturities
The aggregate amounts of long-term debt and other obligations maturing in
the next five years are as follows (in thousands of USD):
Senior MT Mortgage
Notes Notes Note Other Total
-------- ------- -------- ------ --------
2000.............................. $100,000 $ -- $600 $2,500 $103,100
2001.............................. -- 30,500 700 500 31,700
2002.............................. -- 30,000 800 200 31,000
2003.............................. 150,000 30,000 800 200 181,000
2004.............................. -- 50,000 900 200 51,100
Note 5--Stockholders' Equity
Preference Stock and Preference Share Purchase Rights
Mattel is authorized to issue 20.0 million shares of U.S.$0.01 par value
preference stock, of which none is currently outstanding. There are 2.0
million shares of U.S.$0.01 par value preference stock designated as Series E
Junior Participating Preference Stock in connection with a distribution of
Preference Share Purchase Rights (the "Rights") to Mattel's common
stockholders. The Rights may be exercised by their holders to purchase shares
of Mattel's Series E Junior Participating Preference Stock upon the occurrence
of a change of control as defined in the rights agreement. The Rights will
expire on February 17, 2002, unless the agreement is further extended or the
Rights are earlier redeemed or exchanged by Mattel.
Preferred Stock
Mattel is authorized to issue 3.0 million shares of U.S.$1.00 par value
preferred stock, of which 771.9 thousand shares were outstanding as of
December 31, 1998.
--Series A Preferred Stock
During 1997, Learning Company issued 750.0 thousand shares of Series A
Preferred Stock to an investor group in exchange for U.S.$150.0 million of 5
1/2% Notes. Just prior to the consummation of the May 1999 merger, each share
of Series A Preferred Stock was converted into 20 shares of Learning Company
common stock, and the resale restrictions expired.
II-21
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--Series C Mandatorily Convertible Redeemable Preferred Stock ("Series C
Preferred Stock")
During 1996, Tyco sold 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. 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. Each Depositary Share was converted
into a like Mattel depositary share as a result of the March 1997 merger. On
July 1, 1999, all outstanding shares of Series C Preferred Stock (and the
related Depositary Shares) were converted by the holders into 7.7 million
shares of Mattel common stock pursuant to terms of the certificate of
designations.
--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. 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.
Special Voting Preferred Stock
Mattel is authorized to issue one share of U.S.$1.00 par value Special
Voting Preferred Stock, which was issued in exchange for one share of Learning
Company special voting stock in connection with the May 1999 merger. The par
value and liquidation preference of the Special Voting Preferred Stock are
U.S.$1.00 and U.S.$10.00 per share, respectively. The Special Voting Preferred
Stock has a number of votes equal to the number of outstanding exchangeable
shares which are not owned by Mattel, its subsidiaries or any entity
controlled by Mattel. The Special Voting Preferred Stock votes together with
the holders of Mattel's common stock as a single class on all matters on which
the holders of Mattel's common stock may vote. No dividends are paid on the
Special Voting Preferred Stock. The Special Voting Preferred Stock will be
redeemed for U.S.$10.00 on February 4, 2005, the redemption date for the
exchangeable shares, unless the board of directors of Mattel's subsidiary,
Softkey Software Products Inc., extends or accelerates the redemption date.
Common Stock
In May 1998, the stockholders of Mattel approved an amendment to Mattel's
Restated Certificate of Incorporation that increased the number of shares of
authorized common stock from 600.0 million to 1.0 billion 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 Mattel's stock option plans, warrant exercises, and
other general corporate purposes.
Exchangeable Shares and Related Softkey Warrants
As of December 31, 1999 and 1998, there were 3.2 million and 5.2 million
outstanding exchangeable shares, respectively, which were not owned by Mattel,
its subsidiaries or any entity controlled by Mattel. As a
II-22
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
result of the May 1999 merger, each exchangeable share is convertible at the
option of the holder, without additional payment, for the right to receive 1.2
shares of Mattel common stock until February 4, 2005. On that date, any
exchangeable shares not previously converted will be redeemed at the current
market price of Mattel's common stock multiplied by 1.2. The redemption price
will be paid in the form of Mattel common stock, plus cash equal to any unpaid
dividends. The board of directors of Mattel's subsidiary, Softkey Software
Products Inc., may extend the automatic redemption date at its option and may
accelerate the automatic redemption date if the number of outstanding
exchangeable shares is less than 0.5 million. Holders of exchangeable shares
are entitled to receive dividends declared on Mattel's common stock multiplied
by 1.2 as if the exchangeable shares had been converted into common stock.
Holders of exchangeable shares vote their shares through the Special Voting
Preferred Stock at the rate of 1.2 votes per exchangeable share on all matters
on which the holders of Mattel's common stock may vote. As a result of the
1999 merger, each exchangeable share will include the right to acquire
exchangeable shares under a rights agreement issued by Softkey Software
Products Inc. These rights have an economically equivalent value to the Rights
attached to Mattel's common stock.
During the years ended December 31, 1999, 1998 and 1997, 1.9 million, 9.1
million and 0.1 million exchangeable shares, respectively, were converted by
the holders into common stock at the rate of 1.2 common shares per
exchangeable share.
In 1997 and 1998, Mattel's Canadian subsidiary, Softkey Software Products
Inc., issued 4.1 million and 8.7 million warrants in private placements in
Canada for net proceeds of U.S.$57.5 million and U.S.$134.3 million,
respectively. Each warrant was subsequently exchanged in accordance with its
provisions into one exchangeable share without additional payment during 1998.
Stock Compensation Plans
--Mattel Stock Option Plans
In 1996, the stockholders of Mattel 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 Mattel. In addition, nonqualified stock options may be granted to
members of Mattel's board of directors who are not employees of Mattel.
Generally, options are exercisable contingent upon the grantees'
continued employment with Mattel. Nonqualified stock options are granted at
not less than 100% of the fair market value of Mattel'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.
Grants made to individual participants cannot exceed 1.0 million shares in any
single calendar year. On February 4, 1999, Mattel's board of directors
approved an amendment to the 1996 Stock Option Plan authorizing an additional
6.0 million shares for grant in connection with new employees of businesses
acquired by Mattel. The aggregate number of shares of common stock available
for grant under the 1996 Stock Option Plan may not exceed 50.0 million shares.
This plan expires on December 31, 2005. Mattel'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.
In November 1999, the Compensation/Options Committee of Mattel's board of
directors approved the Mattel 1999 Stock Option Plan. Under this plan,
nonqualified stock options, stock appreciation rights and nonvested stock
awards may be granted to key employees who are not officers, directors or
consultants of
II-23
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mattel. Generally, options are exercisable contingent upon the grantee's
continued employment with Mattel. Nonqualified stock options are granted at
not less than 100% of the fair market value of Mattel's common stock on the
date of grant, and expire within ten years from the date of grant. Options
granted under the 1999 Stock Option Plan vest on a schedule determined by the
Compensation/Options Committee. Grants made in 1999 vest over three years at
six month intervals, at a rate of 10% for each six-month period during the
first year and at a rate of 20% per six month period thereafter. Grants made
to individual participants cannot exceed 1.0 million shares in any single
calendar year. The aggregate number of shares of common stock available for
grant under the 1999 Stock Option Plan may not exceed 12.8 million shares.
This plan expires on December 31, 2009.
The fair value of Mattel options granted has been estimated using the
Black-Scholes pricing model. The expected life of these options used in this
calculation has been determined using historical exercise patterns. The
following weighted average assumptions were used in determining fair value:
1999 1998 1997
----- ----- -----
Expected life (in years)............................... 3.90 3.60 3.40
Risk-free interest rate................................ 6.34% 4.61% 5.69%
Volatility factor...................................... 18.46% 15.80% 17.40%
Dividend yield......................................... 0.84% 0.83% 0.86%
The weighted average fair value of Mattel options granted during 1999,
1998 and 1997 were U.S.$4.85, U.S.$7.32 and U.S.$4.86, respectively.
The following is a summary of stock option information and weighted
average exercise prices (in USD) for Mattel's stock option plans during the
year (options in thousands):
1999 1998 1997
-------------- -------------- --------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
Outstanding at January 1..... 16,075 $27.02 17,307 $21.73 13,310 $18.05
Options granted............ 18,208 20.45 3,680 41.66 7,443 25.79
Options exercised.......... (201) 20.93 (4,284) 17.80 (2,807) 14.89
Options canceled........... (1,872) 28.14 (628) 29.79 (639) 22.44
------ ------ ------
Outstanding at December 31... 32,210 $23.28 16,075 $27.02 17,307 $21.73
====== ====== ======
Exercisable at December 31... 10,813 $23.89 5,645 $20.48 5,999 $16.29
====== ====== ======
Available for grant at
December 31................. 9,234 2,358 1,072
====== ====== ======
II-24
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
(in USD) for Mattel stock options outstanding as of December 31, 1999 (options
in thousands):
Options
Outstanding Options
Remaining Exercisable
------------------ -------------
Exercise Price Ranges Number Life Price Number Price
--------------------- ------ ---- ------ ------ ------
$ 4.69 to $13.56......................... 389 5.20 $11.59 259 $10.77
13.69 to 13.69.......................... 7,010 9.84 13.69 -- --
14.00 to 22.40.......................... 3,090 4.65 16.17 2,990 16.05
22.50 to 22.50.......................... 3,816 9.04 22.50 1 22.50
22.56 to 25.63.......................... 3,125 6.76 24.47 1,811 24.57
25.75 to 25.75.......................... 5,063 7.11 25.75 3,162 25.75
25.94 to 26.25.......................... 592 6.93 26.15 507 26.14
26.38 to 26.38.......................... 5,440 9.42 26.38 947 26.38
26.50 to 41.38.......................... 826 7.64 33.37 410 31.40
42.00 to 42.00.......................... 2,859 8.10 42.00 726 42.00
------ ---- ------ ------ ------
$ 4.69 to $42.00......................... 32,210 8.13 $23.28 10,813 $23.89
====== ==== ====== ====== ======
Prior to the March 1997 merger, Tyco had various incentive and non-
qualified stock option plans that provided benefits for eligible participants.
Effective with the 1997 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.
--Mattel 1997 Premium Price Stock Option Plan
In November 1997, the Compensation/Options Committee of the board of
directors approved the Mattel, Inc. 1997 Premium Price Stock Option Plan,
which was subsequently approved by Mattel's stockholders at the May 1998
meeting. Under this plan, premium price options may be granted to officers and
other key employees of Mattel. Grants made to individual participants cannot
exceed 4.5 million shares in any three consecutive calendar years. Grants
under the 1997 Premium Price Stock Option Plan in 1997 were intended to
replace annual grants under the 1996 Stock Option Plan until the end of 2000.
The exercise price of premium price options is calculated at 25% and 33
1/3% above Mattel's six-month average stock price prior to the date of grant.
Options are forfeited unless Mattel's common stock price reaches the premium
exercise price within two years from the date of grant for options with a 25%
premium price and within three years from the date of grant 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 includes
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
stock upon the occurrence of a change of control as defined in the plan. On
February 4, 1999, Mattel's board of directors approved an amendment to the
1997 Premium Price Stock Option Plan authorizing an additional 3.0 million
shares for grant in connection with new employees of businesses acquired by
Mattel, bringing the aggregate number of shares of common stock available for
grant under this plan to 24.0 million. This plan expires on December 31, 2002.
II-25
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of stock option information and weighted
average exercise prices (in USD) for premium price options during the year
(options in thousands):
1999 1998 1997
-------------- ------------- -------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
Outstanding at January 1....... 18,661 $44.04 17,661 $43.58 --
Options granted.............. 3,420 35.00 1,000 52.15 17,661 $43.58
Options exercised............ -- -- --
Options canceled............. (5,139) 39.71 -- --
------ ------ ------ ------
Outstanding at December 31..... 16,942 $43.53 18,661 $44.04 17,661 $43.58
====== ====== ======
Exercisable at December 31..... -- -- --
====== ====== ======
Available for grant at December
31............................ 7,058 2,339 3,339
====== ====== ======
The fair value of premium price options granted has been estimated using
the Black-Scholes pricing model. The following assumptions were used in
determining fair value:
1999 1998 1997
----- ----- -----
Expected life (in years)............................... 5.00 5.00 5.00
Risk-free interest rate................................ 5.16% 5.80% 6.33%
Volatility factor...................................... 39.90% 25.50% 24.10%
Dividend yield......................................... 0.89% 0.83% 0.86%
The fair value of options granted during 1999, 1998 and 1997 was
U.S.$5.37, U.S.$5.10 and U.S.$4.79 for 25% premium price options and
U.S.$5.48, U.S.$4.92 and U.S.$4.86 for 33 1/3% premium price options,
respectively.
The following table summarizes information about the remaining
contractual life (in years) and the exercise prices (in USD) for premium price
options outstanding as of December 31, 1999 (options in thousands):
Options Outstanding
---------------------------------------------------------------------------------
Number Remaining Life Price
------ -------------- ------
660 4.25 $35.24
660 4.25 37.59
7,364 2.85 42.31
7,258 2.85 44.87
500 3.54 50.46
500 3.54 53.83
------
16,942 $43.53
======
--Learning Company Stock Option Plans
Prior to the May 1999 merger, Learning Company and its subsidiaries had
various incentive and nonqualified stock option plans that provided benefits
for eligible employees and non-employee directors. Effective with the 1999
merger, each outstanding option under these plans was converted into an option
to purchase 1.2 shares of Mattel common stock. The exercise price of such
options was adjusted by dividing the Learning Company option price by 1.2.
Other than options granted under some plans assumed by Learning Company in
connection with recent acquisitions, all Learning Company stock options vested
and became fully exercisable as a result of the 1999 merger.
II-26
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of Learning Company options granted prior to the 1999
merger, and during the years ended 1998 and 1997 has been estimated using the
Black-Scholes pricing model. The expected life of these options used in this
calculation has been determined using historical exercise patterns. The
following weighted average assumptions were used in determining fair value:
1999 1998 1997
----- ----- -----
Expected life (in years)............................... 4.00 6.00 4.00
Risk-free interest rate................................ 6.35% 5.13% 6.00%
Volatility factor...................................... 51.00% 68.00% 75.00%
Dividend yield......................................... -- -- --
The weighted average fair value of Learning Company options granted prior
to the 1999 merger, and during the years ended 1998 and 1997 were U.S.$9.83,
U.S.$10.14 and U.S.$8.81, respectively.
The following is a summary of stock option information and weighted
average exercise prices (in USD) for Learning Company's stock option plans
during the year (options in thousands):
1999 1998 1997
-------------- -------------- --------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
Outstanding at January 1..... 17,626 $14.30 16,396 $14.43 14,694 $18.63
Options assumed in
acquisitions.............. -- -- -- -- 860 3.98
Options granted............ 1,415 21.12 8,979 15.29 9,695 11.12
Options exercised.......... (5,278) 10.99 (4,660) 8.77 (1,489) 7.43
Options canceled........... (3,083) 15.94 (3,089) 21.70 (7,364) 16.12
------ ------ ------
Outstanding at December 31... 10,680 $16.19 17,626 $14.30 16,396 $14.43
====== ====== ======
Exercisable at December 31... 9,473 $15.41 6,602 $15.04 7,154 $13.05
====== ====== ======
Available for grant at
December 31................. -- 4,709 3,270
====== ====== ======
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
(in USD) for Learning Company stock options outstanding as of December 31,
1999 (options in thousands):
Options
Options Outstanding Exercisable
----------------------- -------------
Remaining
Exercise Price Ranges Number Life Price Number Price
--------------------- ------ --------- ------ ------ ------
$0.58 to $ 5.63...................... 232 6.87 $ 3.90 222 $ 3.90
6.54 to 12.92....................... 2,026 7.54 10.87 2,016 10.88
12.97 to 23.49...................... 7,361 7.32 15.89 6,479 15.34
24.06 to 34.51...................... 1,025 7.14 29.38 727 29.55
79.92 to 79.92...................... 36 0.83 79.92 29 79.92
------ -----
$0.58 to $79.92...................... 10,680 7.31 $16.19 9,473 $15.41
====== =====
In March 1997, in order to provide a competitive employment environment
for staff retention and hiring, Learning Company instituted an option exchange
program under which certain employees (other than employee directors) with
options exercisable at U.S.$8.67 per share or higher were given the
opportunity to exchange such options for options with an exercise price of
U.S.$8.67 per share. A total of 4.4 million options were exchanged and have
been included in the canceled and granted totals for the year ended December
31, 1997.
II-27
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--Compensation Cost
Mattel, Tyco and Learning Company each 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, 1999, 1998 and 1997. 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, Mattel's net income (loss) and earnings per share
would have been adjusted as follows (amounts in millions of USD except per
share data):
For the Year Ended
------------------------
1999 1998 1997
------- ------ -------
Net income (loss)
As reported................................... $ (82.4) $206.1 $(182.7)
Stock option plans............................ (30.1) (67.1) (38.6)
Premium price stock option plan............... (20.1) (21.1) --
------- ------ -------
Pro forma income (loss)..................... $(132.6) $117.9 $(221.3)
======= ====== =======
Income (loss) per share
Basic
As reported................................. $ (0.21) $ 0.51 $ (0.52)
Stock option and premium price option
plans...................................... (0.12) (0.17) (0.11)
------- ------ -------
Pro forma basic income (loss)............. $ (0.33) $ 0.34 $ (0.63)
======= ====== =======
Diluted
As reported................................. $ (0.20) $ 0.47 $ (0.51)
Stock option and premium price option
plans...................................... (0.12) (0.16) (0.10)
------- ------ -------
Pro forma diluted income (loss)........... $ (0.32) $ 0.31 $ (0.61)
======= ====== =======
The pro forma effect on Mattel's 1998 and 1997 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.
Stock Subscription Warrants
In December 1999, 751.4 thousand warrants were exercised for an equal
number of common shares by the holder in accordance with the terms of the
warrant agreement. In June 1999, 114.2 thousand common shares were issued to a
warrant holder in a cashless exercise in accordance with the terms of the
warrant agreement. As of December 31, 1999, all stock subscription warrants
previously outstanding had been exercised.
Disney Warrant
In 1996, Mattel entered into a licensing agreement with Disney
Enterprises, Inc. Pursuant to this agreement, Mattel issued Disney a warrant
to purchase 3.0 million shares of Mattel's common stock at an exercise price
of U.S.$27.375 per share. This warrant expires no later than April 2, 2004.
The warrant's fair value of U.S.$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%.
The fair value of the warrant is amortized as a component of royalty
expense as the related properties are introduced over the period the related
revenues are recognized. During 1999, 1998 and 1997, U.S.$5.6 million,
U.S.$3.2 million and U.S.$1.1 million, respectively, was recognized in the
results of operations related to this warrant.
II-28
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Learning Company Employee Stock Purchase Plan
In December 1997, Learning Company stockholders approved the 1997
Employee Stock Purchase Plan, which provided certain eligible employees with
the opportunity to purchase shares of common stock at a price of 85% of the
price listed on the New York Stock Exchange at various specified purchase
dates. The plan met the criteria established in SFAS No. 123 for
noncompensatory employee stock purchase plans and therefore, no compensation
expense was recorded in connection with this plan. During the years ended
December 31, 1999 and 1998, approximately 37 thousand and 56 thousand shares,
respectively, were purchased by employees under this plan. As a result of the
May 1999 merger, the 1997 Employee Stock Purchase Plan was terminated.
Prior to their merger with Learning Company, Broderbund also had an
employee stock purchase plan. During the year ended December 31, 1997,
approximately 62 thousand shares were purchased by employees under this plan.
As a result of the merger with Learning Company, the Broderbund employee stock
purchase plan was terminated.
Common Stock Repurchase Plan
Mattel's common stock repurchase plan, initiated in May 1990, provides
for the repurchase of common shares to fund Mattel's stock option plans. The
number of shares to be repurchased is authorized on an annual basis by the
board of directors based upon anticipated reissuance needs. During 1999, 1998,
and 1997, Mattel repurchased 4.0 million, 9.7 million, and 6.5 million shares,
respectively.
Dividends and Capital Transactions
A regular quarterly cash dividend has been declared by the Mattel board
of directors on Mattel's common stock since the second quarter of 1990. The
board of directors increased the quarterly cash dividend from U.S.$0.08 per
common share to U.S.$0.09 per common share in the second quarter of 1999.
Learning Company did not pay dividends on its common stock during 1999 prior
to the May merger and during the years ended December 31, 1998 and 1997.
Note 6--Commitments and Contingencies
Leases
Mattel 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, 1999 (in thousands of USD):
Capitalized Operating
Leases Leases
----------- ---------
2000................................................. $ 300 $ 33,300
2001................................................. 300 24,600
2002................................................. 300 16,300
2003................................................. 300 11,800
2004................................................. 300 11,000
Thereafter........................................... 9,200 4,900
------- --------
$10,700(a) $101,900
======= ========
- --------
(a) Includes U.S.$8.4 million of imputed interest.
II-29
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense under operating leases amounted to U.S.$59.9 million,
U.S.$58.4 million and U.S.$61.5 million for 1999, 1998 and 1997, respectively,
net of sublease income of U.S.$0.6 million, U.S.$0.5 million and U.S.$0.3
million in 1999, 1998 and 1997, respectively.
Commitments
In the normal course of business, Mattel enters into contractual
arrangements to obtain and protect Mattel's right to create and market certain
products 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 Mattel's focus on expanding its product lines
through alliances with businesses in other industries.
The largest commitment involves Mattel's agreements with The Walt Disney
Company and Disney Enterprises, Inc. The licensing agreement with The Walt
Disney Company, which contains annual minimum royalty guarantees, permits
Mattel to use the Disney name and certain characters on preschool and infant
products through September 2002.
The agreement with Disney Enterprises, Inc. grants Mattel exclusive
worldwide rights (with certain exceptions) to produce toys based on all
children-oriented Disney television and film properties introduced. This
agreement spans three years, with Mattel 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 2000
introductions are expected to approximate U.S.$10 million payable over a
three-year period. Pursuant to the agreement, Mattel issued Disney a stock
warrant, valued at U.S.$26.4 million, to purchase 3.0 million shares of
Mattel's common stock.
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 to purchase 3.0
million shares of Mattel's common stock. This warrant became fully vested and
exercisable upon signing of the licensing agreement.
II-30
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Licensing and related agreements provide for terms extending from 2000
through 2007 and contain provisions for future minimum payments as shown in
the following table (in thousands of USD):
Minimum
Payments
--------
2000............................................................... $110,000
2001............................................................... 91,000
2002............................................................... 66,000
2003............................................................... 13,000
2004............................................................... 17,000
Thereafter......................................................... 5,000
--------
$302,000
========
Royalty expense for the years ended December 31, 1999, 1998 and 1997 was
U.S.$219.9 million, U.S.$197.1 million and U.S.$191.6 million, respectively.
As of December 31, 1999, Mattel had outstanding commitments for 2000
purchases of inventory of approximately U.S.$92 million.
Foreign Currency Contracts
To limit the exposure associated with exchange rate movements, Mattel
enters into foreign currency forward exchange and option contracts primarily
as hedges of inventory purchases, sales and other intercompany transactions
denominated in foreign currencies. 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. Had Mattel not entered into hedges to
limit the effect of exchange rate fluctuations on results of operations and
cash flows, 1999 pre-tax income would have been reduced by approximately
U.S.$16 million.
As of December 31, 1999 and 1998, Mattel held the following contracts to
sell foreign currencies (in thousands of USD):
1999 1998
----------------- -----------------
Fair Fair
Amount Value Amount Value
-------- -------- -------- --------
Forwards................................ $342,370 $334,688 $392,972 $394,340
======== ======== ======== ========
Fair value for forwards reflects the amount, based on dealer quotes,
Mattel would receive at maturity for contracts involving the same currencies
and maturity dates, if they had been entered into as of year-end 1999 and
1998, respectively.
As of December 31, 1999 and 1998, Mattel held U.S.$144.7 million and
U.S.$189.1 million, respectively, of foreign currency forward exchange
contracts to purchase foreign currencies. The fair value of these contracts
was U.S.$144.9 million and U.S.$201.8 million as of December 31, 1999 and
1998, respectively. Fair value reflects the amount, based on dealer quotes,
Mattel would pay at maturity for contracts involving the same currencies and
maturity dates, if they had been entered into as of year-end 1999 and 1998,
respectively.
II-31
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes Mattel's foreign currency contracts by
major currency as of December 31, 1999 and 1998 (in thousands of USD):
1999 1998
----------------- -----------------
Buy Sell Buy Sell
-------- -------- -------- --------
US dollar.............................. $342,370 $144,703 $392,972 $189,122
Euro................................... 92,445 253,096 -- --
British pounds sterling................ 6,316 16,679 6,548 66,856
Canadian dollar........................ 7,604 40,679 16,144 18,794
Indonesian rupiah...................... 19,455 -- 10,000 --
Japanese yen........................... -- 19,412 -- 12,501
Swiss franc............................ 14,893 -- 18,341 --
Australian dollar...................... -- 8,438 4,988 21,610
Hong Kong dollar....................... -- -- 55,829 --
French franc........................... -- -- 27,435 9,105
Italian lira........................... -- -- 20,014 68,358
German mark............................ -- -- 19,119 144,660
Spanish peseta......................... -- -- 5,625 2,899
Dutch guilder.......................... -- -- 5,079 8,086
Mexican peso........................... -- -- -- 22,000
Belgian franc.......................... -- -- -- 11,641
Other (under U.S.$5,000)............... 3,990 4,066 -- 6,462
-------- -------- -------- --------
$487,073 $487,073 $582,094 $582,094
======== ======== ======== ========
In order to minimize the risk of counterparty non-performance, Mattel
executes its foreign currency forward exchange and option contracts with
financial institutions believed to be credit-worthy, generally those that
provide Mattel 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. 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 international borrowings and intercompany
invoicing. Mattel does not trade in financial instruments for speculative
purposes.
Litigation
Power Wheels(R) Recall and Related Matters
On October 22, 1998, Mattel announced that Fisher-Price, in cooperation
with the Consumer Product Safety Commission, would conduct a voluntary recall
involving up to 10 million battery-powered Power Wheels(R) ride-on vehicles.
The recall did not result from any serious injury, and involves the
replacement of electronic components that may overheat, particularly when
consumers make alterations to the product. The recall involves vehicles sold
nationwide since 1984 under nearly 100 model names. Additionally, Fisher-Price
has been notified by the Consumer Product Safety Commission that the
Commission is considering whether Fisher-Price may be subject to a fine for
delayed reporting of the facts underlying the recall.
In the third quarter of 1998, Mattel recognized a U.S.$38.0 million pre-
tax charge related to the recall. During the second and fourth quarters of
1999, Mattel recognized additional pre-tax charges totaling U.S.$20.0 million
related to the recall.
II-32
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 U.S.$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. The appeal has been fully briefed, and a hearing took place on March 3,
2000. Mattel intends to continue to defend the action vigorously, including
the appeal.
Toys R Us and Related Matters
On October 2, 1997, the Attorney General of the State of New York filed
in the United States District Court, Eastern District of New York (Case No. CV
97 5714), an action against Toys R Us, Mattel and certain other toy
manufacturers alleging that the defendants had violated federal antitrust laws
and entered into vertical and horizontal arrangements that had the effect of
restricting sales to the warehouse clubs. The attorneys general from forty-
three other states, the District of Columbia and the Commonwealth of Puerto
Rico joined this action. Following the filing of the New York action, a series
of private treble damage class actions under the federal antitrust laws were
filed in various federal district courts. The parties later agreed to have
these related actions transferred to the Eastern District of New York to be
consolidated by the Judicial Panel on Multiple Litigation before Nina Gershon,
United States District Judge. Private class actions were also filed in state
courts in Alabama, California, and New Jersey, asserting claims under state
antitrust law. These state court actions were coordinated with the federal
court actions.
Subsequent mediation efforts resulted in a Settlement Agreement and
Release as to Mattel, Inc., Fisher-Price, and Tyco, effective April 6, 1999.
Pursuant to the terms of the Settlement Agreement and Release, Mattel agreed
to make a cash payment and a toy contribution, both of which were made in the
fourth quarter of 1999. As a result of a dispute between the parties as to the
selection of the toys to be contributed, Mattel negotiated a Supplemental Toy
Contribution Agreement and made a supplemental toy contribution in December
1999. Final Judgment and Order of Dismissal was entered by Judge Gershon on
February 17, 2000 that effectively dismissed with prejudice the claims
asserted by the state and private federal and state court plaintiffs,
including the claims of any person represented in either a parens patriae or
private class capacity.
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. Upon approval
by the court, the consolidated action will be formally dismissed.
II-33
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 shareholders filed purported class action complaints
in the United States District Court for the Central District of California,
the United States District Court for the Southern District of New York and the
United States District Court for Massachusetts naming Mattel and certain of
its 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, including its Learning Company
division, and by falsely representing that the May 1999 Learning Company
acquisition would be immediately accretive to Mattel's 1999 and 2000 financial
results.
Two of the purported class action complaints are brought on behalf of the
former stockholders of Broderbund who acquired shares of Old Learning Company
in exchange for their Broderbund common stock in connection with the Old
Learning Company-Broderbund merger on August 31, 1998. Mattel has been named
as a defendant as the successor-in-interest to Old Learning Company. The
complaints generally allege that that the Old Learning Company-Broderbund
Registration Statement on Form S-4 filed on or about July 14, 1998 in
connection with the merger was materially false.
On November 23, 1999, Mattel (along with other defendants named in the
federal securities lawsuits) filed a motion and brief before the Judicial
Panel on Multidistrict Litigation seeking to transfer all of the federal
actions to the United States District Court for the Central District of
California for Coordinated or Consolidated Pretrial Proceedings. On March 3,
2000, the Judicial Panel on Multidistrict Litigation granted Mattel's motion.
In addition, 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
sustained defendants' demurrer and dismissed the complaint with leave to
amend.
Mattel believes the lawsuits are without merit and intends to defend them
vigorously.
Environmental
--Fisher-Price
Fisher-Price has executed a consent order with the State of New York
involving a remedial action/feasibility study for one of its manufacturing
plants. Currently, Fisher-Price is negotiating an additional consent order
which will outline the specific clean up strategy for the site. Mattel
anticipates that the New York State Department of Environmental Quality will
issue their Record of Decision in March 2000. The ultimate liability
associated with this cleanup presently is estimated to be less than
U.S.$1,425,000, approximately U.S.$1,030,500 of which has been incurred
through December 31, 1999.
--Beaverton, Oregon
Mattel operates a manufacturing facility on a leased property in
Beaverton, Oregon that was acquired as part of the Tyco merger. In March 1998,
samples of groundwater used by the facility for process water and drinking
water disclosed elevated levels of certain chemicals, including
trichloroethylene. Mattel immediately closed the water supply and self-
reported the sample results to the Oregon Department of Environmental Quality
and the Oregon Health Division. Mattel also implemented a community outreach
program to employees, former employees and surrounding landowners.
II-34
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1998, Mattel and another potentially responsible party
entered into a consent order with the Oregon Department of Environmental
Quality to conduct a remedial investigation/feasibility study at the property,
to propose an interim remedial action measure and to continue the community
outreach program. In the second quarter of 1999, Mattel recorded a U.S.$14.0
million pre-tax charge for environmental remediation costs related to this
property, based on the completion and approval of the remediation plan and
feasibility study.
General
Mattel is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and
labor, which Mattel is addressing or defending 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
Mattel's business, financial condition or results of operations.
II-35
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Acquisitions and Nonrecurring Items
Business Combinations
In August 1998, Learning Company completed its merger with Broderbund, a
publisher and developer of consumer software for the home and school market.
The stock-for-stock transaction was approved by the stockholders of
Broderbund, after which Broderbund became a wholly-owned subsidiary of
Learning Company. Under the merger agreement, each outstanding share of
Broderbund common stock was converted into 0.80 shares of Learning Company
common stock and resulted in the issuance of approximately 17 million shares
of Learning Company common stock.
This transaction was accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect the
retroactive restatement of the companies' combined financial position and
operating results. The consolidated statement of stockholders' equity for the
year ended December 31, 1998 has been adjusted to include Broderbund's
unrealized gain on securities of U.S.$0.5 million (included in comprehensive
income) and net income of U.S.$0.2 million for the month ended December 31,
1997. Broderbund's net sales and operating expenses for the month ended
December 31, 1997 were U.S.$28.7 million and U.S.$28.0 million, respectively.
The consolidated statements of operations, cash flows and stockholders' equity
for the years ended December 31, 1997 have been combined with those of
Broderbund for the twelve-month period ended November 30, 1997. The
consolidated statement of stockholders' equity for the year ended December 31,
1997 has been adjusted to include Broderbund's net income of U.S.$8.9 million
for the period from September 1, 1996 through November 30, 1996.
In March 1997, Mattel completed its merger with Tyco, accounted for as a
pooling of interests. Under the merger agreement, each outstanding share of
Tyco common stock was converted into 0.48876 Mattel
II-36
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common shares and resulted in the issuance of approximately 17 million Mattel
common 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. Financial information for
periods prior to the merger reflect the retroactive restatement of the
companies' combined financial position and operating results.
Learning Company also merged with Palladium Interactive, Inc. and P.F.
Magic, Inc. in 1998 and TEC Direct, Inc., Microsystems Software, Inc., Skills
Bank Corporation and Learning Services Inc. in 1997, each of which were
accounted for as poolings of interests. The consolidated financial statements
have not been retroactively restated for the results of operations and
financial position of these companies as the effect of each acquisition
individually and in the aggregate on Learning Company's balance sheet and
results of operations was less than three percent. The consolidated statements
of stockholders' equity for the years ended December 31, 1998 and 1997 have
been adjusted to include the historical results of operations of the acquired
companies of U.S.$34.6 million and U.S.$6.2 million, respectively. A total of
1.6 million and 3.8 million common shares were issued in the years ended
December 31, 1998 and 1997, respectively, as a result of these mergers.
Acquisitions
Mattel acquired the following companies during the years ended December
31, 1998 and 1997. Each of these acquisitions were accounted for using the
purchase method of accounting. The results of operations of the acquired
companies have been included in Mattel's consolidated financial statements
from their respective dates of acquisition. Intercompany accounts and
transactions between the acquired companies and Mattel, as applicable, have
been eliminated.
(Assets)/
Method of Liabilities Incomplete
Month Price Payment Assumed Intangibles Technology
------- ------ ---------- ----------- ----------- ----------
(In millions of USD)
1998
Pleasant Company........ July $715.0 Cash $(25.0) $690.0 $ --
Bluebird Toys PLC....... June 80.0 Cash (20.0) 60.0 --
Sofsource, Inc.......... June 45.0 Stock 6.7 36.8 14.9
Mindscape, Inc. ........ March 152.6 Cash/stock 6.4 119.0 40.0
1997
Creative Wonders,
L.L.C. ................ October $ 37.8 Cash $ 7.3 $ 44.0 $ 1.1
Parsons Technology...... August 31.0 Cash (11.7) 9.3 10.0
II-37
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisition price includes investment advisor and other directly-
related expenses, as applicable. The portion of the purchase price allocated
to incomplete technology was charged to expense in the year of acquisition.
Learning Company also made other minor acquisitions during the last three
years, which were accounted for using the purchase method. These acquisitions
resulted in the issuance of 0.4 million shares of common stock in the year
ended December 31, 1997.
Pro forma results of operations for the effect of 1998 acquisitions have
not been presented as they are not materially different from historical
results from continuing operations. (See discussion of discontinued operations
in Note 12).
II-38
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restructuring and Other Charges
During the second quarter of 1999, Mattel completed its merger with
Learning Company and finalized a previously announced plan of restructuring
and integration. These actions, along with other one-time events, resulted in
a nonrecurring pre-tax charge against operations of U.S.$345.0 million. In the
fourth quarter of 1999, Mattel incurred an additional U.S.$23.5 million charge
relating to its restructuring and integration plan and other one-time charges
which had previously not met the requirement for accrual. In addition, Mattel
reversed U.S.$26.4 million of the second quarter charge based on lower than
anticipated costs and revisions to previous estimates. The restructuring
charge related to the discontinued operations totals $61.0 million. The impact
of these new developments combined with the initial second quarter charge
resulted in a full year nonrecurring charge of U.S.$281.1 million related to
continuing operations, approximately $218 million after-tax or $0.51 per
diluted share. Of the total pre-tax charges, approximately U.S.$235 million
represents cash expenditures.
The restructuring and integration plan, expected to be substantially
complete by June 2000, provides for the consolidation and realignment of
Mattel's operations. The plan was aimed at leveraging global resources in
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.
Components of the restructuring and other nonrecurring charges, including
related adjustments and discontinued operations, are as follows:
Adjustments Balance
----------------- Discontinued Total Amounts December 31,
Plan (Credits) Charges Operations Charges Incurred 1999
---- --------- ------- ------------ ------- -------- -------------
(In millions of USD)
Severance and other
compensation........... $108 $(13) $18 $(35) $ 78 $ (24) $ 54
Distributor, license and
other contract
terminations........... 57 (2) -- (5) 50 (40) 10
Writedown of assets..... 42 (2) -- (15) 25 (25) --
Lease termination
costs.................. 22 (4) -- (3) 15 -- 15
---- ---- --- ---- ---- ----- ----
Total restructuring
costs and asset
writedowns........... 229 (21) 18 (58) 168 (89) 79
Merger-related
transaction and other
costs.................. 86 (5) -- (3) 78 (74) 4
Other nonrecurring
charges................ 30 -- 5 -- 35 (16) 19
---- ---- --- ---- ---- ----- ----
Total restructuring,
asset writedowns and
other charges........ $345 $(26) $23 $(61) $281 $(179) $102
==== ==== === ==== ==== ===== ====
In the fourth quarter of 1999, Mattel adjusted its restructuring and
integration plan and other nonrecurring charges, resulting in a net reduction
of approximately U.S.$3 million. The credits to the restructuring plan of
approximately U.S.$26 million were mainly due to Mattel's recent decision not
to close certain of its marketing offices and one of its manufacturing
facilities. The remaining credits include other changes in estimates and lower
than anticipated costs compared to the previous estimates for completed
components of the plan. Approximately 900 employees will not be terminated as
a result these changes.
II-39
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fourth quarter restructuring charge of approximately U.S.$18 million
relates to the termination of an additional 150 Learning Company employees at
its domestic offices. This action was taken to further consolidate the
operations of Learning Company's domestic offices. The fourth quarter other
nonrecurring charge relates to a U.S.$4.0 million increase to the reserve for
the October 1998 recall of Mattel's Power Wheels(R) vehicles and a
U.S.$1.1 million additional charge related to the Toys R Us-related antitrust
litigation settlement.
A description of the components of the restructuring charges from
continuing operations is as follows:
Severance and other compensation costs relate to the termination of
approximately 2,950 employees around the world. Approximately 2,300 of these
employees are hourly workers located in certain of Mattel's manufacturing
facilities, of which approximately 2,200 were employed in the manufacturing
facility in Kuala Lumpur, which ceased operations in September 1999. The
remainder of the work force reductions consists of downsizing sales and
marketing groups in the US, Europe and Asia-Pacific regions as well as the
elimination of duplicate administrative personnel following the consolidation
of back-office functions, the majority of which are in Europe. As of December
31, 1999, approximately U.S.$24 million had been paid to nearly 2,700
terminated employees. Cash severance payments will extend beyond the
completion of the workforce reductions due to the severance payment options
available to affected employees.
Mattel terminated its sponsorship agreements related to certain
attractions for a total cost of U.S.$37.5 million, inclusive of the writeoff
of related capitalized costs. The cash portion of this charge was paid as of
July 1999. Mattel also recognized a U.S.$12.5 million charge, mainly related
to settlements for termination of certain foreign distributor agreements in
conjunction with the realignment of its sales and distribution network.
Mattel's restructuring plan resulted in the impairment of certain long-
lived assets related to the operations being closed. The sum of the
undiscounted future cash flows of these assets was not sufficient to cover the
carrying amount of these assets. As a result, these long-lived assets were
written down to fair market value and will be depreciated over their remaining
useful lives. Fair value of the impaired assets was determined by either
third-party appraisals or past experience in disposing of similar assets.
Buildings and, to the extent possible, equipment will be sold while the
remainder of the impaired assets will be abandoned when taken out of service.
Nearly all of the revenue-generating activities related to these assets will
continue as a result of more effective utilization of other assets. A
significant portion of the fixed asset writedowns is concentrated in the Toy
Manufacturing segment.
Lease termination costs include penalties imposed upon canceling existing
leases and future obligations under long-term rental agreements at facilities
being vacated following the merger and realignment.
Merger-related transaction costs consist of investment banking fees,
legal, accounting and printing costs, registration fees and other costs
recognized in connection with the merger. Also included in this amount is the
contractual change of control payments arising from the merger. The majority
of all merger-related transaction costs were paid during the second quarter of
1999.
In 1997 Mattel incurred restructuring and integration charges related to
the integration of the business operations of Tyco as a result of its
acquisition and further restructuring of the business operations of Mattel.
II-40
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Nonrecurring Charges
In the third quarter of 1998, Mattel recognized a U.S.$38.0 million pre-
tax charge related to a voluntary recall of certain Power Wheels(R) ride-on
vehicles. During the second and fourth quarters of 1999, Mattel recognized an
additional pre-tax charge totaling U.S.$20.0 million related to the recall.
In the second quarter of 1999, Mattel recorded a U.S.$14.0 million pre-
tax charge for environmental remediation costs related to a manufacturing
facility on a leased property in Beaverton, Oregon, based on the completion
and approval of the remediation plan and feasibility study.
In the fourth quarter of 1998, Mattel recognized a U.S.$6.0 million pre-
tax charge related to the settlement of the Toys R Us-related antitrust
litigation. In the fourth quarter of 1999, Mattel recognized an additional
U.S.$1.1 million in connection with this matter. Mattel made all required cash
and toy contributions during the fourth quarter of 1999.
Note 8--Segment Information
In the 1998 fourth quarter, Mattel adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. This statement supersedes Statement of Financial
Accounting Standards No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of Mattel's reportable segments. This statement requires disclosure
of certain information by reportable segment, geographic area and major
customer.
II-41
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tables below present 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 USA
Toys, US Fisher-Price/Tyco Preschool and Other. USA Toys principally sells
products in the Girls, Entertainment and Wheels categories. US Fisher-
Price/Tyco Preschool principally sells products in the Infant and Preschool
categories. The Other segment principally sells specialty products in the
Girls category. 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 from continuing operations before restructuring and other charges,
interest expense, and provision for income taxes. The consolidated total
profit from operations presented in the following tables represents income
from continuing operations before income taxes and extraordinary item as
reported in the consolidated statements of operations. The segment assets are
comprised of accounts receivable and inventories, net of applicable reserves
and allowances.
For the Year
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(In thousands of USD)
Revenues
Toy Marketing
USA Toys......................... $ 2,067,412 $ 2,134,146 $ 2,279,528
US Fisher-Price/Tyco Preschool... 941,208 902,018 1,030,906
Other............................ 316,902 256,089 58,330
International.................... 1,571,149 1,698,769 1,726,735
Toy Manufacturing.................. 1,426,167 1,488,502 1,554,047
----------- ----------- -----------
Segment total.................. 6,322,838 6,479,524 6,649,546
Elimination of intersegment sales.. (1,426,167) (1,486,320) (1,552,029)
Sales adjustments.................. (301,181) (294,867) (318,854)
----------- ----------- -----------
Net sales from continuing
operations.................... $ 4,595,490 $ 4,698,337 $ 4,778,663
=========== =========== ===========
II-42
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year
-------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands of USD)
Operating Profit (Loss)
Toy Marketing
USA Toys............................... $ 316,601 $ 344,142 $ 478,579
US Fisher-Price/Tyco Preschool......... 105,519 97,813 87,742
Other.................................. 5,433 20,235 7,300
International.......................... 108,922 154,590 218,659
Toy Manufacturing........................ 223,952 151,905 144,058
--------- --------- ---------
Segment total........................ 760,427 768,685 936,338
Restructuring and other charges.......... (281,107) (44,000) (275,000)
Interest expense......................... (131,609) (110,833) (90,130)
Corporate and other...................... (177,547) (154,406) (146,126)
--------- --------- ---------
Income from continuing operations
before income taxes................. $ 170,164 $ 459,446 $ 425,082
========= ========= =========
As of Year End
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands of USD)
Assets
Toy Marketing
USA Toys............................ $ 497,697 $ 571,976 $ 588,154
US Fisher-Price/Tyco Preschool...... 230,237 279,773 337,680
Other............................... 96,538 71,575 --
International....................... 566,203 602,063 538,099
Toy Manufacturing..................... 60,796 88,613 73,048
---------- ---------- ----------
Segment total..................... 1,451,471 1,614,000 1,536,981
Corporate and other................... (13,183) (46,592) (16,721)
---------- ---------- ----------
Accounts receivable and
inventories, net from continuing
operations....................... $1,438,288 $1,567,408 $1,520,260
========== ========== ==========
II-43
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands of USD)
Depreciation/Amortization*
Toy Marketing
USA Toys....................................... $ 74,976 $ 60,910 $ 51,358
US Fisher-Price/Tyco Preschool................. 38,673 41,376 43,926
Other.......................................... 27,912 14,071 --
International.................................. 52,366 49,234 45,024
Toy Manufacturing................................ 28,859 25,629 32,145
-------- -------- --------
Segment total................................ 222,786 191,220 172,453
Corporate and other.............................. 23,224 23,085 17,458
-------- -------- --------
Depreciation and amortization from continuing
operations.................................. $246,010 $214,305 $189,911
======== ======== ========
- --------
* Included in depreciation and amortization are charges for tooling. Such
charges are allocated among segments based on a percentage of relative sales.
The Toy Marketing segments sell a broad variety of children's toy
products, which are grouped into four major categories: Girls, Infant and
Preschool, Entertainment and Wheels. The table below presents revenues from
external customers by category:
For the Year
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands of USD)
Girls.................................. $2,004,064 $2,055,903 $2,159,676
Infant and Preschool................... 1,627,296 1,684,196 1,739,900
Wheels................................. 736,140 708,345 590,424
Entertainment.......................... 486,257 479,891 421,700
Other.................................. 42,914 64,869 185,817
---------- ---------- ----------
4,896,671 4,993,204 5,097,517
Sales adjustments...................... (301,181) (294,867) (318,854)
---------- ---------- ----------
Net sales from continuing operations... $4,595,490 $4,698,337 $4,778,663
========== ========== ==========
II-44
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tables below present information by geographic area. Revenues are
attributed to countries based on location of customer. Long-lived assets
principally include net property, plant and equipment, and goodwill.
For the Year
--------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands of USD)
Net Sales
United States.............................. $3,194,780 $3,183,020 $3,214,592
International.............................. 1,400,710 1,515,317 1,564,071
---------- ---------- ----------
Consolidated total......................... $4,595,490 $4,698,337 $4,778,663
========== ========== ==========
As of Year End
--------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands of USD)
Long-Lived Assets
United States.............................. $1,242,786 $1,301,236 $ 577,727
International.............................. 673,635 634,011 512,972
---------- ---------- ----------
1,916,421 1,935,247 1,090,699
Corporate and other........................ 257,786 245,985 229,625
---------- ---------- ----------
Consolidated total......................... $2,174,207 $2,181,232 $1,320,324
========== ========== ==========
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. Mattel's
two largest customers accounted for the following percentage of consolidated
net sales and net accounts receivable:
1999 1998 1997
---- ---- ----
Worldwide sales for the year ended............................ 36% 32% 33%
Accounts receivable as of December 31......................... 31% 27% 40%
II-45
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- ---------- ----------
(In thousands of USD, except per share
amounts)
Year Ended December 31, 1999(a)
Net sales......................... $688,315 $ 802,271 $1,587,703 $1,517,201
Gross profit...................... 315,374 359,659 781,822 725,166
Advertising and promotion
expenses......................... 91,161 96,875 222,597 273,886
Other selling and administrative
expenses......................... 201,519 198,511 204,722 263,203
Amortization of intangibles....... 13,012 12,960 13,123 12,915
Restructuring and other
charges(b)....................... -- 293,100 -- (11,993)
Other expense (income), net....... 2,244 985 (1,469) (7,103)
Income (loss) from continuing
operations before income taxes... (17,420) (270,386) 306,830 151,140
Income (loss) from continuing
operations....................... (12,630) (210,981) 222,145 109,853
Income (loss) from discontinued
operations....................... 17,679 6,647 (86,812) (128,274)
Net income (loss)................. 5,049 (204,334) 135,333 (18,421)
Preferred stock dividend
requirements..................... (1,990) (1,990) -- --
Net income (loss) applicable to
common shares.................... 3,059 (206,324) 135,333 (18,421)
Basic income (loss) per common
share:
Income (loss) from continuing
operations..................... $ (0.04) $ (0.52) $ 0.52 $ 0.26
Income (loss) from discontinued
operations..................... 0.05 0.02 (0.20) (0.30)
Net income (loss)............... $ 0.01 $ (0.50) $ 0.32 $ (0.04)
Weighted average number of
common shares.................. 396,480 409,040 425,148 425,680
Diluted income (loss) per common
share:
Income (loss) from continuing
operations..................... $ (0.04) $ (0.52) $ 0.52 $ 0.26
Income (loss) from discontinued
operations..................... 0.05 0.02 (0.20) (0.30)
Net income (loss)............... $ 0.01 $ (0.50) $ 0.32 $ (0.04)
Weighted average number of
common and common equivalent
shares......................... 396,480 409,040 429,455 426,504
Dividends declared per common
share............................ $ 0.08 $ 0.09 $ 0.09 $ 0.09
Common stock market price:
High............................ $ 27.81 $ 29.00 $ 26.69 $ 16.88
Low............................. 21.50 22.88 19.00 11.81
Year Ended December 31, 1998(a)
Net sales......................... $697,426 $ 861,188 $1,642,189 $1,497,534
Gross profit...................... 318,878 404,588 832,887 753,442
Advertising and promotion
expenses......................... 95,443 109,838 243,477 337,638
Other selling and administrative
expenses......................... 181,967 190,614 211,503 278,459
Amortization of intangibles....... 7,563 7,591 12,564 13,611
Restructuring and other
charges(c)....................... -- -- 38,000 6,000
Other expense (income), net(d).... 132 (3,798) 12,148 (3,234)
Income from continuing operations
before income taxes.............. 17,381 84,718 277,537 79,810
Income from continuing
operations....................... 12,401 60,456 198,273 57,123
Income (loss) from discontinued
operations....................... (68,358) (55,878) (29,539) 31,575
Net income (loss)................. (55,957) 4,578 168,734 88,698
Preferred stock dividend
requirements..................... (1,990) (1,990) (1,990) (1,990)
Net income (loss) applicable to
common shares.................... (57,947) 2,588 166,744 86,708
Basic income (loss) per common
share:
Income from continuing
operations..................... $ 0.03 $ 0.15 $ 0.49 $ 0.14
Income (loss) from discontinued
operations..................... (0.18) (0.14) (0.07) 0.08
Net income (loss)............... $ (0.15) $ 0.01 $ 0.42 $ 0.22
Weighted average number of
common shares.................. 376,364 384,596 399,218 397,237
Diluted income (loss) per common
share:
Income from continuing
operations..................... $ 0.03 $ 0.14 $ 0.45 $ 0.13
Income (loss) from discontinued
operations..................... (0.17) (0.13) (0.06) 0.07
Net income (loss)............... $ (0.14) $ 0.01 $ 0.39 $ 0.20
Weighted average number of
common and common equivalent
shares......................... 410,323 423,407 435,123 424,296
Dividends declared per common
share............................ $ 0.07 $ 0.08 $ 0.08 $ 0.08
Common stock market price:
High............................ $ 45.63 $ 43.63 $ 42.31 $ 39.63
Low............................. 35.63 36.00 28.00 21.69
- --------
(a) Financial information for first quarter 1999 and full year 1998 has been
restated retroactively for the effects of the May 1999 merger with Learning
Company, accounted for as a pooling of interests.
II-46
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Represents integration and restructuring charges in the second quarter of
1999 related to the Learning Company merger, and other nonrecurring
charges. The nonrecurring credit for the fourth quarter of 1999 represents
net adjustments made to the restructuring and nonrecurring charges
recorded in the second quarter of 1999.
(c) Includes a nonrecurring charge in the third quarter related to a voluntary
recall of certain Power Wheels(R) ride-on vehicles, and a one-time charge
in the fourth quarter in connection with the Toys R Us-related antitrust
litigation settlement, which reduced diluted earnings per share from
continuing operations by U.S.$0.06 and U.S.$0.01, respectively.
(d) Includes unrealized foreign currency exchange losses in the third quarter
that were partially recovered in the fourth quarter.
Note 10--Supplemental Financial Information
As of Year End
---------------------
1999 1998
---------- ----------
(In thousands of USD)
Inventories include the following:
Raw materials and work in process..................... $ 41,452 $ 42,851
Finished goods........................................ 394,864 541,507
---------- ----------
$ 436,316 $ 584,358
========== ==========
Prepaid expenses and other current assets include the
following:
Deferred income taxes................................. $ 64,258 $ 178,060
Other................................................. 101,959 99,888
---------- ----------
$ 166,217 $ 277,948
========== ==========
Intangibles, net include the following:
Goodwill.............................................. $1,191,227 $1,253,531
Other................................................. 9,395 10,931
---------- ----------
$1,200,622 $1,264,462
========== ==========
Other assets include the following:
Deferred income taxes................................. $ 185,912 $ 23,123
Other................................................. 248,794 180,313
---------- ----------
$ 434,706 $ 203,436
========== ==========
Short-term borrowings include the following:
Notes payable......................................... $ 121,805 $ 56,006
Commercial paper...................................... 247,744 78,000
---------- ----------
$ 369,549 $ 134,006
========== ==========
Accrued liabilities include the following:
Advertising and promotion............................. $ 155,192 $ 147,551
Restructuring and other charges....................... 130,552 33,497
Royalties............................................. 99,249 99,674
Other................................................. 329,640 370,291
---------- ----------
$ 714,633 $ 651,013
========== ==========
II-47
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Year
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands of USD)
Selling and administrative expenses include the
following:
Research and development.......................... $171,537 $168,743 $146,032
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................ $134,086 $103,627 $ 94,320
Income taxes.................................... 81,345 93,936 105,812
Noncash investing and financing activities:
Common stock issued for acquisitions:
Settlement of earn-out agreements............... $ 5,547 $ 5,572 $ 2,023
Sofsource, Inc.................................. -- 45,000 --
Mindscape, Inc.................................. -- 30,000 --
Other........................................... -- -- 7,321
Conversion of 5 1/2% Notes........................ -- 96,695 202,033
Conversion of 7% Notes............................ -- -- 16,034
Increase in paid-in capital due to value of in-
the-money employee
stock options acquired in connection with
acquisitions..................................... -- -- 2,969
II-48
MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. It also requires that gains or losses resulting from changes in
the values of those derivatives be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Mattel is required
to adopt this statement for its fiscal year beginning January 1, 2001.
Management believes the adoption of this statement will not have a material
impact on Mattel's consolidated financial position or results of operations.
Note 12--Discontinued Operations
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.
Summary financial information for the discontinued operations is as
follows (in millions of USD):
For the Year
-------------------------
1999 1998 1997
------- ------- -------
Net sales........................................... $ 919.5 $ 922.9 $ 676.9
======= ======= =======
Loss before income taxes............................ $(280.9) $ (67.8) $(423.9)
(Benefit) provision for income taxes................ (90.1) 54.4 44.0
------- ------- -------
Net loss............................................ $(190.8) $(122.2) $(467.9)
======= ======= =======
As of Year End
----------------
1999 1998
------- -------
Accounts receivable, net...................................... $ 268.0 $ 167.0
Inventories................................................... 108.0 59.9
Other current assets.......................................... 192.2 350.6
Intangibles, net.............................................. 192.7 220.2
Other noncurrent assets....................................... 154.2 87.5
Current liabilities........................................... (252.1) (325.8)
5 1/2% Senior Notes and other long-term liabilities........... (201.0) (208.8)
------- -------
Net investment in discontinued operations..................... $ 462.0 $ 350.6
======= =======
II-49