EXHIBIT 13.0
Mattel, Inc. 1998 Annual Report 24
Financial Information
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Five-Year Summary 25
Management's Discussion and 26
Analysis of Financial Condition
And Results of Operations
Consolidated Financial Statements 33
Notes to Consolidated 37
Financial Statements
Management Report on Responsibility 52
for Financial Reporting
Report of Independent Accountants 52
Mattel, Inc. and Subsidiaries 25
Five-Year Financial Summary
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For the Year Ended December 31 (a)
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(In thousands, except per share and percentage information) 1998 1997 1996 1995 1994
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Operating Results:
Net sales $4,781,892 $4,834,616 $4,535,332 $4,369,816 $3,971,226
Gross profit 2,362,993 2,400,000 2,219,758 2,067,740 1,881,060
% of net sales 49% 50% 49% 47% 47%
Operating profit (b) 575,896 515,212 636,982 607,651 449,228
% of net sales 12% 11% 14% 14% 11%
Income before income taxes and extraordinary item 465,063 425,082 536,756 504,668 362,157
Provision for income taxes 132,799 135,288 164,532 166,779 137,487
Income before extraordinary item 332,264 289,794 372,224 337,889 224,670
Extraordinary item - loss on early retirement of debt - (4,610) - - -
Net income 332,264 285,184 372,224 337,889 224,670
Income Per Common Share (c):
Income before extraordinary item
Basic 1.11 0.96 1.26 1.13 0.74
Diluted 1.10 0.94 1.23 1.11 0.73
Net income
Basic 1.11 0.95 1.26 1.13 0.74
Diluted 1.10 0.93 1.23 1.11 0.73
Dividends Declared Per Common Share (c) 0.31 0.27 0.24 0.19 0.15
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As of Year End (a)
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(In thousands) 1998 1997 1996 1995 1994
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Financial Position:
Cash and marketable securities $ 212,454 $ 694,947 $ 550,271 $ 511,061 $ 290,157
Accounts receivable, net 983,050 1,091,416 948,940 886,344 990,346
Inventories 584,358 428,844 444,178 407,551 405,427
Total assets 4,262,165 3,803,791 3,581,142 3,341,370 3,150,438
Short-term borrowings 134,006 17,468 28,924 76,443 57,531
Long-term liabilities 1,124,756 808,297 633,342 721,739 606,430
Stockholders' equity 1,820,198 1,822,070 1,805,923 1,551,680 1,385,777
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(a) Consolidated financial information for 1994-1997 has been restated
retroactively for the effects of the March 1997 merger with Tyco Toys, Inc.
("Tyco"), accounted for as a pooling of interests.
(b) Represents income from operations before interest expense and provision for
income taxes. In 1998, operating profit was reduced by a nonrecurring charge
of $38.0 million related to a voluntary recall of certain Power Wheels(R),
ride-on vehicles and a one-time charge of $6.0 million in connection with
the proposed Toys R Us-related antitrust litigation settlement. In 1997,
operating profit was reduced by a nonrecurring charge of $275.0 million for
transaction, integration and restructuring costs related to the merger with
Tyco. In 1996, operating profit was reduced by a nonrecurring charge of
$21.8 million related to the accounting for certain royalties and
participation fees in prior periods. In 1995, operating profit was reduced
by a nonrecurring charge of $8.9 million related to a restructuring program
implemented to reduce operating expenses at certain of Tyco's business
units. In 1994, operating profit was reduced by a nonrecurring charge of
$76.7 million principally related to the consolidation of manufacturing
operations and the reduction of headquarters expense and support functions
worldwide.
(c) Per share data reflect the retroactive effect of stock splits distributed to
stockholders in March 1996, January 1995 and January 1994, and the 1997
merger with Tyco.
Mattel, Inc. and Subsidiaries 26
Management's Discussion and Analysis of
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Financial Condition and Results of Operations
Cautionary Statement
Certain expectations and projections regarding the future performance of Mattel,
Inc. and its subsidiaries ("Mattel" or the "Company") discussed in this annual
report are forward-looking and are made under the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. These expectations and
projections are based on currently available competitive, financial, and
economic data along with the Company's operating plans and are subject to
certain future events and uncertainties. Forward-looking statements can be
identified by the use of forward-looking terminology, such as may, will, should,
expect, anticipate, estimate, continue, plans, intends or other similar
terminology. Management cautions you that the following factors, among others,
could cause the Company's actual consolidated results of operations and
financial position in 1999 and thereafter to differ significantly from those
expressed in forward-looking statements:
Marketplace Risks
- - Increased competitive pressure, both domestically and internationally,
which may affect the sales of the Company's products
- - Significant changes in the buying patterns of major customers, such as the
recent shift by some retailers to just-in-time inventory management, which may
limit the Company's ability to accurately forecast reorders or cause a
decrease in sales after related expenses have already been incurred
- - Dependence on the timely development, introduction and customer
acceptance of new products, which may affect the Company's ability to
successfully redesign, restyle and extend existing core products and
product lines and to successfully bring new products to market
- - Possible weaknesses in economic conditions, both domestically and
internationally, which may affect the sales of the Company's products and
the costs associated with manufacturing and distributing these products
Financing Considerations
- - Currency fluctuations, which may affect the Company's reportable income
- - Significant changes in interest rates, both domestically and
internationally, which may affect the Company's cost of financing both its
operations and investments
Merger-Related Risks
- - Difficulty integrating the operations of The Learning Company, Inc. into the
Company following the proposed merger, which may impede the Company's ability
to achieve savings or operating synergies from the merger
Year 2000 Compliance
- - Potential inability of computer systems or software products used by the
Company and/or its customers and suppliers to properly recognize and process
date-sensitive information beyond January 1, 2000, which may result in an
interruption in normal business operations of the Company, its suppliers and
customers
Other Risks
- - Inability to achieve cost savings expected as part of restructuring
activities, which may result in higher than expected costs following such
restructurings
- - Development of new technologies, including the Internet, which may create new
risks to the Company's ability to protect its intellectual property rights
- - Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products or environmental activities or
trade restrictions, which may lead to increased costs or interruption in
normal business operations of the Company
- - Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal business
operations of the Company
Summary
You should read this analysis in conjunction with the Company's consolidated
financial statements that begin on page 33.
Mattel designs, manufactures, and markets a broad variety of
children's products on a worldwide basis through both sales to retailers
and direct to consumers. The Company's business is dependent in great part
on its ability each year to redesign, restyle and extend existing core
products and product lines, to design and develop innovative new products
and product lines, and to expand its marketing capability.
The Company plans to continue to focus on its portfolio of brands
that have fundamental play patterns and have historically had worldwide
appeal, have been sustainable, and have delivered consistent profitability.
The Company's portfolio of brands can be grouped in the following four
categories:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
software, Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R), and Polly
Pocket(R)
Infant and Preschool - including Fisher-Price(R), Disney preschool and plush,
Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna Doodle(R), and
View-Master(R)
Entertainment - including Disney, Nickelodeon(R), games, and puzzles
Wheels - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and
Tyco(R) Radio Control
Segment Information
Mattel's reportable segments are separately managed business units and include
marketing and manufacturing. The marketing segment is divided on a geographic
basis between domestic and international. The domestic segment is further
divided into USA Toys, Fisher-Price/Tyco Preschool and Other. USA Toys
principally sells products in the Girls, Entertainment and Wheels categories,
which Fisher-Price/Tyco Preschool sells principally Infant and Preschool
Products. The Other segment is principally involved in selling specialty
products in the Girls category. The international segment sells products in all
categories. Operations Mattel's manufacturing segment, manufactures toy
products, which are sold to the marketing segments. Financial information
regarding the Company's segments can be found in Note 8 to the consolidated
financial statements.
Results of Operations
The following is a percentage analysis of operating results for the past
three years:
For the Year
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1998 1997 1996
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Net sales 100% 100% 100%
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Gross profit 49.4% 49.6% 48.9%
Advertising and promotion expenses 17.0 16.1 17.2
Other selling and administrative expenses 18.5 16.5 17.0
Amortization of intangibles 0.9 0.6 0.7
Restructuring and integration charges - 5.7 -
Special charges 0.9 - -
Other expense (income), net 0.1 - -
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Operating profit 12.0 10.7 14.0
Interest expense 2.3 1.9 2.2
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Income before income taxes and extraordinary item 9.7% 8.8% 11.8%
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Mattel, Inc. and Subsidiaries 27
1998 Compared to 1997
Net income for 1998 was $332.3 million or $1.10 per diluted share as compared to
$285.2 million or $0.93 per diluted share in 1997. 1998 net income was impacted
by a $27.2 million after-tax charge ($0.09 per diluted share) related to a
voluntary recall of certain Power Wheels(R) ride-on vehicles and a one-time
charge of $4.3 million after taxes ($0.01 per diluted share) in connection with
the proposed Toys R Us-related antitrust litigation settlement. Net sales for
1998 reached $4.78 billion, a decrease of 1% from $4.83 billion in 1997.
Cutbacks in purchases by retailers to adjust to a just-in-time buying pattern
negatively impacted sales. Sales in the Girls category decreased 4% largely due
to a 14% decline in Barbie(R) products, as a result of high retail inventory
levels entering 1998. As a result of the Pleasant Company acquisition in July
1998, the American Girl(R) brand contributed $213.2 million in gross sales,
which helped to partially offset the decline in Barbie(R). Sales in the Infant
and Preschool category decreased 3%, largely attributable to declines in Sesame
Street(R) and Fisher-Price(R) products, partially offset by an increase in
Disney's Winnie the Pooh(R). Sales in the Wheels category grew 21%, reflecting
growth in both Hot Wheels(R) and Matchbox(R) vehicles and playsets. Sales in the
Entertainment category, which includes Disney and Nickelodeon(R), increased 14%
largely due to this year's introduction of toys associated with the feature
motion pictures "A Bug's Life" and "The Rugrats Movie".
Sales to customers within the US declined 2% and accounted for 66% of
consolidated gross sales in both 1998 and 1997. Sales to customers outside the
US were down 1%, including an unfavorable foreign exchange effect of
approximately $30 million due to the generally stronger US dollar relative to
1997. At comparable foreign exchange rates, sales internationally grew 1%.
Gross profit as a percentage of net sales remained relatively constant at
49.4% compared to 49.6% in 1997. As a percentage of net sales, advertising and
promotion expenses increased approximately one percentage point to 17.0%, and
selling and administrative expenses increased two percentage points to 18.5%.
Both these ratios increased relative to last year as a result of unanticipated
cutbacks in buying by retailers due to a continuing shift by these retailers to
just-in-time inventory management. To respond to such shifts, the Company took
appropriate actions to adjust its own shipping to more of a just-in-time
pattern. As a result, products that would have previously been shipped in
December will be shipped closer to the time that they will be purchased by the
consumer. The Company plans to manage its advertising and selling and
administrative levels in 1999 to bring them back in line with its historical
ratios. Amortization of intangibles increased by $9.8 million, mainly due to the
amortization of goodwill in connection with the 1998 acquisitions of Pleasant
Company and Bluebird Toys PLC ("Bluebird").
Interest expense increased $20.7 million primarily due to increased short-
and long-term borrowings to finance the Company's 1998 acquisitions of Pleasant
Company and Bluebird.
1997 Compared to 1996
Net income for 1997 was $285.2 million or $0.93 per diluted share as compared to
$372.2 million or $1.23 per diluted share in 1996. 1997 net income was impacted
by a $209.7 million after-tax charge ($0.71 per diluted share) related to a
nonrecurring charge for transaction, integration and restructuring costs related
to the Mattel restructuring and Tyco integration, and an extraordinary loss of
$4.6 million net of taxes ($0.01 per diluted share) for the early retirement of
debt assumed as part of the Tyco merger. Net sales for 1997 were $4.83 billion,
an increase of 7% from $4.54 billion in 1996. Sales growth included a $138.5
million unfavorable foreign exchange effect from the generally stronger US
dollar relative to 1996. Sales in the Girls category grew 4% due to the strength
in Barbie(R) and Barbie(R)-related products, partially offset by declines in
large and small dolls. Sales in the Infant and Preschool category increased 15%,
led by strength in Sesame Street(R) and Disney's Winnie the Pooh(R), partially
offset by a decline in Fisher-Price(R) products. The Wheels category increased
21%, driven by an increase in Hot Wheels(R). Sales in the Entertainment
category, which includes Disney and Nickelodeon(R), decreased 4%.
Sales to customers within the US grew 14% and accounted for 66% of
consolidated gross sales in 1997 compared to 62% in 1996. Sales to customers
outside the US decreased 5%, including the unfavorable foreign exchange effect
of the generally stronger US dollar relative to the prior year. At comparable
foreign exchange rates, sales internationally grew 3%.
Gross profit as a percentage of net sales increased to 49.6% from 48.9%,
principally due to improved product mix. As a percentage of net sales,
advertising and promotion expenses decreased approximately one percentage point
to 16.1%, primarily due to cost savings realized from the Company's merger with
Tyco. As a percentage of net sales, other selling and administrative expenses
decreased to 16.5% from 17.0%, reflecting the impact of the Company's effort to
control costs and direct cost savings realized from the 1997 Tyco integration
and Mattel restructuring plan.
Interest expense decreased $10.1 million largely due to lower average
domestic short-term borrowings during 1997.
Income Taxes
The effective income tax rate was approximately 29% in 1998 compared to 32% in
1997 and 31% in 1996. The effective tax rate decreased in 1998 due to an
increase in income earned in locations with lower tax rates and a reduction in
restructuring expenses without income tax benefits.
Pre-tax income earned from US operations as a percentage of the
consolidated pre-tax income is less than the sales to US customers as a
percentage of the consolidated gross sales. This difference results from
corporate headquarters expenses incurred n the US that decreased US pre-tax
income and from profits from foreign manufacturing activities that relate to
sales ultimately made to US customers.
Financial Position
The Company's financial position remained strong in 1998 primarily due to
its profitable operating results. At December 31, 1998, the Company's cash
position was $212.4 million, compared to $694.9 million as of the end of
1997. Cash decreased $482.5 million primarily due to cash consideration
paid in connection with the acquisitions of Pleasant Company and Bluebird.
Accounts receivable decreased $108.4 million to $983.1 million due to lower
orders by major
Mattel, Inc. and Subsidiaries 28
retailers in fourth quarter 1998. Inventories increased $155.5 million to $584.4
million, reflecting the sales shortfall in the 1998 fourth quarter and the
addition of Pleasant Company inventory. Property, plant and equipment, net grew
$134.9 million to $736.5 million due to assets acquired as part of the
acquisition of Pleasant Company and investments in the expansion of the
Company's manufacturing facilities located in Mexico and Asia. Intangibles
increased $719.4 million to nearly $1.25 billion due to goodwill generated from
the Pleasant Company and Bluebird acquisitions.
Short-term borrowings increased $116.5 million compared to 1997 from
financing the acquisitions of Pleasant Company and Bluebird. Current portion of
long-term liabilities increased $19.9 million primarily due to the
reclassification of $30.0 million in medium-term notes payable in 1999 from
long-term debt.
A summary of the Company's capitalization is as follows:
As of Year End
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(In millions) 1998 1997
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Medium-term notes $ 540.5 18% $ 520.5 20%
Senior notes 400.0 14 100.0 4
Other long-term debt obligations 43.0 1 55.0 2
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Total long-term debt 983.5 33 675.5 26
Other long-term liabilities 141.3 5 132.8 5
Stockholders' equity 1,820.2 62 1,822.1 69
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$2,945.0 100% $2,630.4 100%
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Total long-term debt increased $308.0 million mainly due to the issuance of
$300.0 million of senior notes to finance the acquisitions of Pleasant Company
and Bluebird. Medium-term notes increased by $20.0 million due to the issuance
of $50.0 million in notes, partially offset by the reclassification of $30.0
million payable in 1999 to current portion of long-term debt. The Company
expects to satisfy its future long-term capital needs through the retention of
corporate earnings and the issuance of long-term debt instruments. In November
1998, the Company filed its current universal shelf registration statement
allowing it to issue up to $400.0 million of debt and equity securities, all of
which was available to be issued as of December 31, 1998. Stockholders' equity
of $1.8 billion remained consistent with 1997 as a result of treasury stock
purchases and dividend declarations on common and preferred stock, which were
largely offset by profitable operating results and reissuance of treasury stock
for the exercise of nonqualified stock options by the Company's employees.
Liquidity
The Company's primary sources of liquidity over the last three years have
been cash on hand at the beginning of the year, cash flows generated from
operations, long-term debt issuances and short-term seasonal borrowings.
Profitable operating activities generated cash flows of $547.5 million
during 1998, compared to $481.9 million in 1997 and $524.8 million in 1996.
The Company invested its cash flows during the last three years in
the acquisitions of Pleasant Company and Bluebird, additions to tooling in
support of new products, and construction of new manufacturing facilities.
The Company received cash flows from the issuance of senior notes
in 1998 and medium-term notes in 1998 and 1997. Cash received from these
debt issuances was used to fund the acquisitions of Pleasant Company and
Bluebird, to retire higher-cost debt and to support operating activities.
In 1998, the Company repaid the long-term debt and mortgage note assumed as
part of the Pleasant Company acquisition. In 1997, the Company redeemed
the 10-1/8% notes assumed as part of the acquisition of Tyco and repaid its
6-7/8% senior notes upon maturity. Cash was also spent during the last
three years to purchase treasury stock to provide shares for issuance under
the Company's employee stock option plans and the exercise of outstanding
warrants. In addition, over the last three years, the Company has
consistently increased its cash payments for common dividends.
Seasonal Financing
The Company expects to finance its seasonal working capital requirements for the
coming year by using existing and internally generated cash, issuing commercial
paper, selling certain trade receivables and using various short-term bank lines
of credit. The Company's domestic committed unsecured credit facility provides
$1.0 billion in short-term borrowings from a commercial bank group. This
facility provides for up to $700.0 million in advances and backup for commercial
paper issuances, and up to an additional $300.0 million for nonrecourse
purchases of certain trade accounts receivable by the bank group over the next
four years. Under its domestic credit facility, the Company is required to meet
financial covenants for consolidated debt-to-capital and interest coverage.
Currently the Company is in compliance with such covenants.
The Company also expects to have approximately $370 million of individual
short-term foreign credit lines with a number of banks available in 1999, which
will be used as needed to finance seasonal working capital requirements of
certain foreign affiliates.
Pending Business Combination
In December 1998, Mattel and The Learning Company entered into a merger
agreement. The stock-for-stock transaction is subject to approval by the
stockholders of both Mattel and The Learning Company and by certain regulatory
agencies. The merger will be accounted for as a pooling of interests, which
means that for accounting and financial reporting purposes, Mattel and The
Learning Company will treat their companies as if they had always been combined.
The combined company will likely incur transaction costs of approximately $75
million to $85 million, including investment banking, legal and accounting fees,
and contractual incentive benefits. Management believes the merger will be
completed in the second quarter of 1999. The number of shares of Mattel common
stock to be issued to The Learning Company's common and preferred stockholders,
together with the Mattel common stock to be issued upon the exchange of the
exchangeable shares of The Learning Company's Canadian subsidiary, is expected
to represent between approximately 27% and 30% of Mattel's outstanding voting
power after the merger, depending on the actual exchange ratio at the time of
the merger.
Mattel, Inc. and Subsidiaries 29
Acquisitions
During 1998, the Company acquired Pleasant Company and Bluebird. These
acquisitions were accounted for using the purchase method of accounting, which
means that the results of operations of the acquired companies have been
included in Mattel's consolidated financial statements from their respective
dates of acquisition. Proforma financial information for these acquisitions has
not been presented since they did not meet the test of significance individually
or in the aggregate.
In July 1998, the Company completed its acquisition of Pleasant Company, a
Wisconsin-based direct marketer of books, dolls, clothing, accessories, and
activity products included under the American Girl(R) brand name. The Company
paid approximately $715 million, including investment advisor and other costs
directly related to the acquisition. The excess of cost over the estimated fair
market value of tangible net assets acquired was approximately $690 million.
Total excess has been allocated to customer lists, a covenant not-to-compete,
and magazine subscription lists that are being amortized on a straight-line
basis over a 3 to 15 year period, with the remaining excess being amortized on a
straight-line basis over 40 years.
In June 1998, the Company acquired Bluebird, a company organized in the
United Kingdom, from which Mattel previously licensed the product designs for
the Polly Pocket(R) and Disney Tiny Collections brands, as well as the Polly
Pocket(R) trademarks. The Company paid approximately $80 million, which included
investment advisor and other directly related expenses. Intercompany accounts
and transactions between Mattel and Bluebird have been eliminated from the
consolidated financial statements. The excess of cost over the estimated fair
market value of tangible net assets acquired was approximately $60 million,
which is being amortized on a straight-line basis over 40 years.
Business Combination and Related Integration and Restructuring Charge
In March 1997, the Company completed its merger with Tyco. The merger was
accounted for as a pooling of interests, which means that for accounting and
financial reporting purposes, Mattel's consolidated financial statements have
been restated to present the combined companies' financial position and results
of operations for 1996 through 1997. Under the merger agreement, each Tyco
common stockholder received 0.48876 shares of Mattel common stock for each share
of Tyco common stock outstanding, which resulted in the issuance of
approximately 17 million Mattel common shares. Each share of Tyco Series B and
Series C preferred stock was converted into like Mattel preferred stock.
In connection with this merger, the Company commenced an integration and
restructuring plan and recorded a $275.0 million pre-tax charge against
operations in March 1997. After related tax effects, the Company's 1997 earnings
were impacted by $0.71 per diluted share as a result of the net $209.7 million
charge. The integration and restructuring activity was substantially complete as
of December 31, 1998. The Company realized annualized cost savings of
approximately $160 million, mainly in the areas of cost of production,
advertising, selling and administrative expenses, and financing costs.
Special Charges
In the 1998 third quarter, the Company voluntarily recalled certain Power
Wheels(R) ride-on vehicles and recognized a $38.0 million pre-tax charge in its
results of operations. After related tax effects, the net $27.2 million charge
impacted the 1998 earnings by $0.09 per diluted share. 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 Company believes the amount reserved will be sufficient to cover all costs
associated with the recall.
In the 1998 fourth quarter, the Company recognized a $6.0 million pre-tax
charge related to the proposed settlement of the Toys R Us-related antitrust
litigation. After related tax effects, the net $4.3 million charge impacted the
1998 earnings by $0.01 per diluted share. The Company is required to make cash
and toy contributions prior to November 1999 according to the terms of the
proposed settlement agreement.
Litigation
- - Beaverton, Oregon
The Company operates a manufacturing facility on a leased property in Beaverton,
Oregon that was acquired as part of its merger with Tyco. In March 1998, samples
of groundwater used by the facility for process water and drinking water
disclosed elevated levels of certain chemicals, including trichloroethylene
("TCE"). The Company immediately closed the water supply and self-reported the
sample results to the Oregon Department of Environmental Quality ("DEQ") and the
Oregon Health Division. The Company also implemented an employee communication
and medical screening program.
In November 1998, the Company and another potentially responsible
party entered into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the site, to propose an interim remedial
action measure and to continue the community outreach program to employees,
former employees and surrounding landowners. It is not presently possible
to estimate the cost to the Company related to the DEQ's investigation and
any subsequent orders for future work.
- - Toys R Us
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc. The
administrative law judge made findings of fact and conclusions of law that the
toy retailer Toys R Us, Inc. had violated federal antitrust laws and entered
into vertical and horizontal arrangements with various toy manufacturers,
including Mattel, whereby the manufacturers would refuse to do business with
warehouse clubs, or would do business with warehouse clubs only on terms
acceptable to Toys R Us. On October 13, 1998, the Federal Trade Commission
issued an opinion and a final order affirming the findings and conclusions of
the administrative law judge. Toys R Us has now filed a notice of appeal in the
United States Court of Appeals for the Seventh Circuit.
Following the announcement of the administrative law judge's decision, the
Company was named as a defendant, along with certain other toy manufacturers, in
a number of antitrust actions in various
Mattel, Inc. Subsidiaries 30
states related to the Toys R Us matter. The Company has also been named as a
defendant in a series of private treble damage class actions under federal
antitrust laws that have been filed in various federal district courts.
Since May 1998, the Company has participated in settlement negotiations
being conducted with the aid of a mediator. In connection with a proposed
settlement, the Company recognized a $6.0 million pre-tax charge in the fourth
quarter of 1998. After related tax effects, the net $4.3 million charge impacted
the Company's 1998 earnings by $0.01 per diluted share. The proposed settlement
agreement calls for the Company to make cash and toy contributions prior to
November 1999. Until such time as these matters are concluded in the various
courts involved, the Company intends to vigorously defend itself in the
litigation in which it was named involving Toys R Us.
- - Greenwald
On October 13, 1995, Michelle Greenwald filed a complaint against the Company in
Superior Court of the State of California, County of Los Angeles. Ms. Greenwald
is a former employee whom the Company terminated in July 1995. Her complaint
sought $50 million in general and special damages, plus punitive damages, for
breach of oral, written and implied contract, wrongful termination in violation
of public policy and violation of California Labor Code Section 970. Ms.
Greenwald claimed that her termination resulted from complaints she made to
management concerning general allegations that the Company did not properly
account for sales and certain costs associated with sales and more specific
allegations that the Company failed to properly account for certain royalty
obligations to The Walt Disney Company. During 1996 and 1997, the Company filed
motions for summary judgment on all areas of her complaint and these motions
were granted. In 1998, Ms. Greenwald filed a notice of appeal, which is
scheduled to be considered in March 1999. The Company intends to defend the
action vigorously, including her appeal.
- - Pending Business Combination
During December 1998, a total of six separate purported class action complaints
were filed by several stockholders of The Learning Company in the Court of
Chancery of the State of Delaware in and for New Castle County against The
Learning Company and its board of directors for alleged breaches of fiduciary
duties in connection with the proposed merger. The six complaints have since
been consolidated. The consolidated complaint seeks the certification as a class
of all The Learning Company stockholders, an injunction against the merger,
rescission if the merger is consummated, damages, costs and disbursements,
including attorneys' fees. The consolidated complaint alleges that The Learning
Company board of directors breached their fiduciary duties to The Learning
Company's stockholders by, among other things, failing to conduct due diligence
sufficient to have discovered material, adverse information concerning Mattel's
anticipated operational and financial results and agreeing to an exchange ratio
that failed to protect The Learning Company stockholders against a decline in
the value of Mattel common stock. The consolidated complaint names Mattel as an
additional defendant, claiming that Mattel aided and abetted the alleged
breaches of fiduciary duty. Mattel will aggressively defend itself against the
action and will continue to pursue the merger.
- - Other Matters
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability, labor, and
environmental cleanup, which the Company 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 the Company's consolidated financial position or results of
operations.
Commitments
In the normal course of business, the Company enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect the Company's right to create and
market certain products. These arrangements include commitments for future
inventory purchases and royalty payments. Certain of these commitments routinely
contain provisions for guaranteed or minimum expenditures during the term of the
contracts.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million. Licensing and similar
agreements with terms extending through the year 2003 contain provisions for
future guaranteed minimum payments aggregating approximately $371 million. In
addition, under a certain licensing agreement, the Company may have additional
commitments of up to $37.8 million in the year 2000 payable over three years.
Foreign Currency Risk
The Company's results of operations and cash flows can be impacted by exchange
rate fluctuations. To limit the exposure associated with exchange rate
movements, the Company enters into foreign currency forward exchange and option
contracts primarily to hedge its purchase of inventory, sales and other
intercompany transactions denominated in foreign currencies. The Company's
results of operations can also be affected by the translation of foreign
revenues and earnings into US dollars.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. The Company seeks to mitigate its exposure to market
risk by monitoring its currency exchange exposure for the year and partially or
fully hedging such exposure. In addition, the Company manages its exposure
through the selection of currencies used for foreign borrowings and intercompany
invoicing. The Company does not trade in financial instruments for speculative
purposes.
The Company's foreign currency forward exchange contracts that were used to
hedge firm foreign currency commitments as of December 31, 1998 and 1997 are
shown in the following table.
These contracts generally mature within 18 months from the date of
execution. Contracts outstanding at year-end mature during the next 13 months.
All contracts are against the US dollar and are maintained by reporting units
with a US dollar functional currency, with the exception of the Indonesian
rupiah contracts that are maintained by an entity with a rupiah functional
currency.
Mattel, Inc. and Subsidiaries 31
For the purchase of foreign currencies, fair value reflects the amount,
based on dealer quotes, that the Company would pay at maturity for contracts
involving the same currencies and maturity dates, if they had been entered into
as of year-end 1998 and 1997. For the sale of foreign currencies, fair value
reflects the amount, based on dealer quotes, that the Company would receive at
maturity for contracts involving the same currencies and maturity dates, if they
had been entered into as of year-end 1998 and 1997. The differences between the
fair value and the contract amounts are expected to be fully offset by foreign
currency exchange gains and losses on the underlying hedged transactions.
Buy Sell
----------------------------------- -----------------------------------
Weighted Weighted
Contract Average Fair Contract Average Fair
(In thousands of US dollars) Amount Contract Rate Value Amount Contract Rate Value
- -----------------------------------------------------------------------------------------------------------
1998
German marks $ 19,119 1.67 $ 18,984 $144,660 1.68 $145,688
Italian lira 20,014 1,764.00 21,155 68,358 1,660.00 67,950
Hong Kong dollars 55,829 8.02 57,790 - - -
French francs 27,435 5.62 27,536 9,105 5.82 9,479
British pounds sterling 6,548 0.60 6,415 66,856 0.61 66,950
Canadian dollars 16,144 1.55 16,545 18,794 1.46 18,119
Spanish pesetas 5,625 142.30 5,577 2,899 148.23 2,997
Dutch guilders 5,079 1.89 5,050 8,086 1.96 8,342
Japanese yen - - - 12,501 116.00 12,759
Australian dollars 4,988 1.66 5,268 21,610 1.58 21,732
Belgian francs - - - 11,641 35.46 11,871
Swiss francs 18,341 1.37 18,251 - - -
Mexican peso - - - 22,000 10.02 21,956
Indonesian rupiah 10,000 15,720.50 19,183 - - -
Singapore dollar - - - 3,962 1.64 3,943
Brazilian real - - - 2,500 1.25 2,554
- -----------------------------------------------------------------------------------------------------------
$189,122 $201,754 $392,972 $394,340
- -----------------------------------------------------------------------------------------------------------
1997
German marks $ 19,179 1.78 $ 18,972 $ 65,119 1.77 $ 64,941
Italian lira 38,277 1,800.00 39,203 53,161 1,749.00 52,585
Malaysian ringitts 53,304 3.08 41,551 - - -
Hong Kong dollars 148,084 8.04 149,108 2,527 7.76 2,532
French francs - - - 38,166 5.86 37,639
British pounds sterling 32,548 0.61 32,751 72,580 0.63 73,570
Canadian dollars 22,608 1.42 22,474 - - -
Spanish pesetas - - - 13,858 148.99 13,668
Dutch guilders 12,778 2.00 12,666 36,285 1.96 35,719
Japanese yen - - - 7,956 125.73 7,659
Australian dollars 6,398 1.54 6,391 - - -
Belgian francs - - - 55,126 36.48 54,515
Swiss francs 13,677 1.44 13,454 - - -
Mexican peso - - - 4,200 8.05 4,138
Indonesian rupiah 15,230 3,930.78 9,891 - - -
Singapore dollar - - - 4,107 1.72 4,203
- -----------------------------------------------------------------------------------------------------------
$362,083 $346,461 $353,085 $351,169
- -----------------------------------------------------------------------------------------------------------
The Company did not enter into any new foreign currency option contracts
during 1998, and no option contracts remained outstanding as of December 31,
1998. As of December 31, 1997, the total amount of the option contracts was
$93.5 million and the fair value was $90.5 million. Fair value reflects the
amount of US dollars the Company would receive from the current contracts, less
the option value. The option value is determined based on dealer quotes for
contracts involving the same currencies and maturity dates.
Euro
The Treaty on European Economic and Monetary Union provides for the introduction
of a single European currency, the Euro, in substitution for the national
currencies of the member states of the European Union that adopt the Euro. The
transition period for member states joining the Monetary Union began on January
1, 1999 and will end on July 1, 2002 when the national currencies of member
states will cease to exist. Currently, the Company is unable to assess whether
the adoption of the Euro by the Monetary Union will have a material impact on
its financial position or results of operations in the future.
Manufacturing Risk
The Company owns and operates manufacturing facilities and utilizes third-party
manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and
Thailand. A risk of political instability and civil unrest exists in these
countries, which could temporarily or permanently damage the Company's
manufacturing operations located there. The Company's business, financial
position and results of operations would be negatively impacted by a significant
disruption to its manufacturing operations or suppliers.
Effects of Inflation
Inflation rates in the US and in major foreign countries where the Company does
business have not had a significant impact on its results of operations or
financial position during the three years
Mattel, Inc. and Subsidiaries 32
ended December 31, 1998. The US Consumer Price Index increased 1.6% in 1998,
1.7% in 1997 and 3.3% in 1996. The Company receives some protection from the
impact of inflation from high turnover of inventories and its ability to pass on
higher prices to consumers.
Year 2000 Update
Many currently installed computer systems and software products, including
several used by the Company, are coded to accept only two-digit (rather than
four-digit) entries in the date code field used to define the applicable year.
In such instances, the first two characters are assumed to be "19". Beginning in
the year 2000 or perhaps earlier if referencing a date in the year 2000, such
computer systems and software products may recognize a date using "00" as the
year 1900, rather than the year 2000, which could result in miscalculations or
system failures. To address the year 2000 issue, in early 1998 the Company
established a project team and initiated a comprehensive plan that is designed
to assess, remediate and test Mattel's internal systems, hardware and processes,
including key operational, manufacturing and financial systems. The progress of
this plan is continually monitored and regularly reported to management. In
addition, the Company's board of directors is regularly informed about the year
2000 issue both generally and as it may affect the Company's business.
The Company's internal year 2000 project team oversees all aspects of
implementing the plan. The team is comprised of staff members from the
information systems department having the requisite knowledge of the Company's
computer systems, including all the technical aspects of the systems. Key user
group designees from business areas are included on each system team, which is
guided by a central project team. The Company does not plan on engaging outside
consultants, technicians or other external resources to assist in formulating
and implementing the program.
The Company's plan adheres to a multi-step process that includes five
distinct phases of activity: (1) awareness; (2) inventory and risk assessment;
(3) code and system modification; (4) testing; and (5) contingency planning.
Under the first two phases of the plan, all operational, manufacturing and
financial systems were inventoried and evaluated. This inventory included all
software systems, computer hardware, facilities, and production equipment
containing or depending upon a computer chip. As a result of such evaluation,
the Company established detailed plans and action steps required to address all
aspects of the year 2000 issue, including all code and system modifications
(phase 3). The Company has completed the awareness, inventory and code change
phases of the plan as scheduled prior to December 1998. Critical system
verification and testing (phase 4) is expected to be complete by July 1999.
The Company initiated formal communications with each of its significant
suppliers and customers to determine the extent to which they are addressing the
year 2000 issue and the effect on its business should those parties fail to
adequately address the issue. To date, the Company has received responses from
the majority of the initial contacts. These responses have been positive and
support the overall initiatives toward achieving year 2000 compliance. The
Company is actively following-up with those customers and suppliers failing to
reply to the initial inquiry.
Due to the general uncertainty inherent in the year 2000 issue, largely
resulting from uncertainty of the readiness of third-party suppliers and
customers, the Company is currently unable to assess the overall impact on its
business. The risk of third-party suppliers and customers not correcting a
material year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations of such suppliers, customers,
and/or the Company. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial position. As a result,
during the first half of 1999 the Company is developing contingency plans (phase
5), which it expects to be complete by July 1999. Contingency planning is being
done on a worldwide basis by all the business units. Each unit will concentrate
on factors external to the Company which may adversely impact their ability to
conduct operations. Specifically, for those locations where a high likelihood of
a material failure exists, the Company will establish revised procedures for
managing operations, including identification of alternate suppliers and vendors
whose systems are year 2000 compliant.
While there is no guarantee, management believes that the Company's year
2000 plan should greatly reduce its level of uncertainty about the issue and
mitigate the possibility of significant interruptions of ongoing operations.
Additionally, its global presence and broad-based manufacturing capability
should provide the Company with numerous options to further mitigate the risk of
year 2000 non-compliance.
As of December 31, 1998, the Company has spent approximately $6 million and
expects to incur a total of approximately $10 million in connection with
addressing the year 2000 issue. These costs are largely due to the use of
internal resources dedicated to achieving year 2000 compliance. Costs are
charged to expense as they are incurred. Work on the year 2000 issue has not
delayed any internal projects that would have a material effect on the Company's
consolidated financial position or results of operation. All costs of addressing
the year 2000 issue will be funded from internally generated cash.
The Company sells software products as part of its core businesses. All
software products currently available for sale to consumers and those products
previously purchased by consumers are year 2000 compliant. Software products
manufactured for the Company by third-parties under licensing agreements have
been certified as year 2000 compliant by such manufacturers. The Company will
continue to ensure that all its software products in development are year 2000
compliant.
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. The Company is required to adopt this
statement for its fiscal year beginning January 1, 2000. Management believes the
adoption of this statement will not have a material impact on the Company's
consolidated financial position or results of operations.
Mattel, Inc. and Subsidiaries 33
Consolidated Balance Sheets
- -------------------------------------
December 31, December 31,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 212,454 $ 694,947
Accounts receivable, less allowances of $41.2 million at December 31, 1998
and $30.7 million at December 31, 1997 983,050 1,091,416
Inventories 584,358 428,844
Prepaid expenses and other current assets 277,948 246,529
- --------------------------------------------------------------------------------------------------------------
Total current assets 2,057,810 2,461,736
- --------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 35,113 29,556
Buildings 271,580 198,396
Machinery and equipment 512,225 453,978
Capitalized leases 23,271 24,625
Leasehold improvements 82,643 68,179
- --------------------------------------------------------------------------------------------------------------
924,832 774,734
Less: accumulated depreciation 375,724 336,946
- --------------------------------------------------------------------------------------------------------------
549,108 437,788
Tools, dies and molds, net 187,349 163,809
- --------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 736,457 601,597
- --------------------------------------------------------------------------------------------------------------
Other Noncurrent Assets
Goodwill, net 1,253,531 534,128
Other assets 214,367 206,330
- --------------------------------------------------------------------------------------------------------------
$4,262,165 $3,803,791
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 134,006 $ 17,468
Current portion of long-term liabilities 33,518 13,659
Accounts payable 293,421 310,117
Accrued liabilities 651,013 629,445
Income taxes payable 205,253 202,735
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 1,317,211 1,173,424
- --------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
6-3/4% senior notes, due 2000 100,000 100,000
6% senior notes, due 2003 150,000 -
6-1/8% senior notes, due 2005 150,000 -
Medium-term notes 540,500 520,500
Mortgage note 43,007 43,573
Other 141,249 144,224
- --------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,124,756 808,297
- --------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, Series C $1.00 par value, $125.00 liquidation preference per
share, 772.8 thousand shares authorized; 771.9 thousand shares issued and
outstanding in 1998 and 1997, respectively 772 772
Common stock $1.00 par value, 1.0 billion shares authorized; 300.4 million shares
issued in 1998 and 1997, respectively 300,381 300,381
Additional paid-in capital 482,662 509,172
Treasury stock at cost; 14.3 million and 8.8 million shares in 1998 and 1997,
respectively (495,347) (285,420)
Retained earnings 1,724,677 1,490,804
Accumulated other comprehensive loss (192,947) (193,639)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,820,198 1,822,070
- --------------------------------------------------------------------------------------------------------------
$4,262,165 $3,803,791
==============================================================================================================
Commitments and Contingencies (See accompanying notes.)
The accompanying notes are an integral part of these statements.
Mattel, Inc. and Subsidiaries 34
Consolidated Statements of Operations
- ----------------------------------------
For the Year
--------------------------------------------
(In thousands, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Net Sales $4,781,892 $4,834,616 $4,535,332
Cost of sales 2,418,899 2,434,616 2,315,574
- -------------------------------------------------------------------------------------------------------------------------
Gross Profit 2,362,993 2,400,000 2,219,758
Advertising and promotion expenses 813,293 779,139 778,919
Other selling and administrative expenses 882,127 796,952 772,335
Amortization of intangibles 41,929 32,179 32,489
Special charges 44,000 - -
Restructuring and integration charges - 275,000 -
Interest expense 110,833 90,130 100,226
Other expense (income), net 5,748 1,518 (967)
- -------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Extraordinary Item 465,063 425,082 536,756
Provision for income taxes 132,799 135,288 164,532
- -------------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Item 332,264 289,794 372,224
Extraordinary item - loss on early retirement of debt - (4,610) -
- -------------------------------------------------------------------------------------------------------------------------
Net Income 332,264 285,184 372,224
Preferred stock dividend requirements 7,960 10,505 7,391
- -------------------------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Shares $ 324,304 $ 274,679 $ 364,833
=========================================================================================================================
Basic Income Per Common Share
Income before extraordinary item $ 1.11 $ 0.96 $ 1.26
Extraordinary item - loss on early retirement of debt - (0.01) -
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 1.11 $ 0.95 $ 1.26
=========================================================================================================================
Weighted average number of common shares 291,481 290,450 290,393
=========================================================================================================================
Diluted Income Per Common Share
Income before extraordinary item $ 1.10 $ 0.94 $ 1.23
Extraordinary item - loss on early retirement of debt - (0.01) -
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 1.10 $ 0.93 $ 1.23
=========================================================================================================================
Weighted average number of common and common equivalent shares 303,243 295,653 303,057
=========================================================================================================================
Dividends Declared Per Common Share $ 0.31 $ 0.27 $ 0.24
=========================================================================================================================
The accompanying notes are an integral part of these statements.
Consolidated results for 1997 and 1996 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
Mattel, Inc. and Subsidiairies 35
Consolidated Statements of Cash Flows
- ------------------------------------------
For the Year
--------------------------------------------
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 332,264 $ 285,184 $ 372,224
Adjustments to reconcile net income to net cash flows from operating activities:
Noncash restructuring and integration charges - 90,382 -
Loss on early retirement of debt, net of tax - 4,610 -
Depreciation 169,116 154,994 144,672
Amortization 45,789 34,917 36,671
Increase (decrease) from changes in assets and liabilities:
Accounts receivable 140,248 (201,909) (71,348)
Inventories (47,715) (33,012) (38,304)
Prepaid expenses and other current assets (16,295) (75,810) 15,310
Accounts payable, accrued liabilities and income taxes payable (83,865) 161,640 58,072
Deferred compensation and other retirement plans 2,690 369 9,110
Deferred income taxes (999) 64,015 (2,147)
Other, net 6,268 (3,526) 551
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 547,501 481,854 524,811
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (114,387) (96,006) (108,641)
Purchases of other property, plant and equipment (161,860) (125,567) (122,498)
Payment for acquisitions, net of cash acquired (782,588) (8,625) (8,625)
Investment in other long-term assets (10,783) (7,816) (25,114)
Proceeds from sale of business and other property, plant and equipment 18,667 31,484 6,250
Net proceeds from sales of marketable securities - - 17,315
Other, net (1,484) 566 317
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (1,052,435) (205,964) (240,996)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Short-term borrowings, net 109,110 (6,957) (45,652)
Proceeds from issuance of notes 350,000 310,000 -
Payments of long-term debt (99,310) (234,823) (33,717)
Exercise of stock options and warrants including related tax benefit 114,656 59,677 99,614
Purchase of treasury stock (351,093) (227,932) (269,771)
Sale of treasury stock - 71,248 -
Issuance of preferred stock - - 92,702
Payment of dividends on common and preferred stock (97,970) (84,537) (66,473)
Other, net (1,050) (2,904) (3,127)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash flows from (used) for financing activities 24,343 (116,228) (226,424)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (1,902) (14,986) (806)
- ---------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (482,493) 144,676 56,585
Cash at Beginning of Year 694,947 550,271 493,686
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 212,454 $ 694,947 $ 550,271
=================================================================================================================================
The accompanying notes are an integral part of these statements.
Consolidated results for 1997 and 1996 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
Mattel, Inc. and Subsidiaries 36
Consolidated Statements of Stockholders' Equity
- -----------------------------------------------
Accumulated
Additional Other Total
Preferred Common Paid-In Treasury Retained Comprehensive Stockholders'
(In thousands) Stock Stock Capital Stock Earnings Income (Loss) Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 52 $296,080 $432,150 $ (75,574) $ 994,645 $ (95,673) $1,551,680
Comprehensive income:
Net income 372,224 372,224
Currency translation adjustments 8,728 8,728
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 372,224 8,728 380,952
Purchase of treasury stock (269,771) (269,771)
Restricted stock activity 2,770 (6,627) (3,857)
Exercise of stock options 11 26,414 26,425
Issuance of treasury stock (53,554) 124,315 70,761
Issuance of stock warrant 26,444 26,444
Issuance of preferred stock 773 91,929 92,702
Exercise of stock subscription warrants (9,507) 11,658 2,151
Dividends declared on common stock (65,825) (65,825)
Dividends declared on preferred stock 2 1,650 (7,391) (5,739)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 827 296,091 518,296 (215,999) 1,293,653 (86,945) 1,805,923
Comprehensive income (loss):
Net income 285,184 285,184
Currency translation adjustments (106,694) (106,694)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) 285,184 (106,694) 178,490
Purchase of treasury stock (227,932) (227,932)
Issuance of treasury stock (45,486) 158,511 113,025
Exercise of stock options 636 23,927 24,563
Conversion of 7% notes 893 15,141 16,034
Conversion of preferred stock (55) 2,761 (2,706) -
Dividends declared on common stock (77,528) (77,528)
Dividends declared on preferred stock (10,505) (10,505)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 772 300,381 509,172 (285,420) 1,490,804 (193,639) 1,822,070
Comprehensive income:
Net income 332,264 332,264
Currency translation adjustments 692 692
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 332,264 692 332,956
Purchase of treasury stock (351,393) (351,393)
Issuance of treasury stock (65,210) 141,466 76,256
Exercise of stock options 38,700 38,700
Dividends declared on common stock (90,431) (90,431)
Dividends declared on preferred stock (7,960) (7,960)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $772 $300,381 $482,662 $(495,347) $1,724,677 $(192,947) $1,820,198
==================================================================================================================================
The accompanying notes are an integral part of these statements.
Consolidated results for December 31, 1995 and 1996 have been restated
retroactively for the effects of the March 1997 merger with Tyco, accounted for
as a pooling of interests. See Note 7.
Mattel, Inc. and Subsidiaries 37
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, Inc. and
its subsidiaries ("Mattel" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation, and certain
amounts in the financial statements for prior years have been reclassified to
conform with the current year presentation. Investments in joint ventures and
other companies are accounted for by the equity method or cost basis depending
upon the level of the investment and/or the Company's ability to exercise
influence over operating and financial policies. Financial data for 1997 and
1996 reflect the retroactive effect of the merger, accounted for as a pooling of
interests, with Tyco Toys, Inc. consummated in March 1997 (see Note 7).
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into US dollars at
fiscal year-end exchange rates. Income, expense and cash flow items are
translated at weighted average exchange rates prevailing during the fiscal year.
The resulting currency translation adjustments are recorded as a component of
other comprehensive income or loss within stockholders' equity.
Cash
Cash includes cash equivalents, which are highly liquid investments with
maturities of three months or less when purchased. Because of the short
maturities of these instruments, the carrying amount is a reasonable estimate of
fair value.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
estimated useful lives of 10 to 40 years for buildings, 18 months to 10 years
for machinery and equipment, and 10 to 20 years, not to exceed the lease term,
for leasehold improvements. Tools, dies and molds are amortized using the
straight-line method over 18 months to 3 years.
Intangibles and Long-Lived Assets
Intangible assets consist of the excess of purchase price over the fair value of
net assets acquired in purchase acquisitions, and the cost of acquired patents
and trademarks. Intangible assets are amortized using the straight-line method
over periods ranging from 18 months to 40 years. Accumulated amortization was
$228.2 million and $186.1 million as of December 31, 1998 and 1997,
respectively.
The Company periodically reviews the carrying value of its fixed and
intangible assets to identify and assess any impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
assets.
Revenue Recognition
Net sales are recognized when products are shipped. Accruals for customer
discounts and rebates, and defective returns are recorded as the related
revenues are recognized.
Advertising Costs
The Company expenses the costs of media advertising 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.
Stock-Based Compensation
The Company 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 the Company's plans as
such options are granted at not less than the quoted market price of the
Company's common stock on the date of grant.
Income Taxes
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax
bases of assets and liabilities, applying enacted statutory tax rates in effect
for the year in which the differences are expected to reverse.
Income and Dividends Per Common Share
The 1997 and 1996 share and per share data presented in these financial
statements reflect the retroactive effects of the March 1997 Tyco merger.
Mattel, Inc. and Subsidiaries 38
In the 1997 fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. Accordingly, data for 1997 and
1996 have been restated to present basic and diluted income per common share.
Basic income per common share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during each period. Earnings available to common stockholders represent reported
net income less preferred stock dividend requirements.
Diluted income per common share is computed by dividing diluted earnings
available to common stockholders by the weighted average number of common and
common equivalent shares outstanding during each period. The calculation of
common equivalent shares assumes the exercise of dilutive stock options and
warrants, net of assumed treasury share repurchases at average market prices,
and conversion of dilutive preferred stock and convertible debt, as applicable.
Diluted earnings available to common stockholders represent earnings available
to common stockholders plus preferred stock dividend requirements and interest
savings resulting from the assumed conversions of dilutive securities.
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):
1998 1997 1996
-----------------------------------------------------------------
Earnings Shares Earnings Shares Earnings Shares
- --------------------------------------------------------------------------------------------
Income before
extraordinary item $332,264 $289,794 $372,224
Extraordinary item -
loss on early
retirement of debt - (4,610) -
- --------------------------------------------------------------------------------------------
Net income 332,264 285,184 372,224
Less: preferred
stock dividend
requirements (7,960) (10,505) (7,391)
- --------------------------------------------------------------------------------------------
Earnings available
to common
stockholders $324,304 291,481 $274,679 290,450 $364,833 290,393
Dilutive securities:
Dilutive stock
options 3,369 3,975 4,087
Warrants 662 639 927
7% Notes - - 479 589 728 783
Preferred stock
dividend
requirements 7,960 7,731 - - 7,391 6,867
- --------------------------------------------------------------------------------------------
Diluted earnings
available to
common
stockholders $332,264 303,243 $275,158 295,653 $372,952 303,057
- --------------------------------------------------------------------------------------------
Premium price stock options totaling 18.7 million were excluded from the
calculation of diluted earnings per share in 1998 because they were anti-
dilutive in each quarter and for the full year. Preferred stock was excluded
from the calculation of diluted earnings per share in 1997 because it was anti-
dilutive. A warrant issued in 1996 to purchase 3.0 million shares of the
Company's common stock was excluded from the calculation of diluted earnings per
share because it was anti-dilutive in 1997 and 1996. The dilutive impact of this
warrant was minimal in the first quarter and full year 1998 calculations and was
anti-dilutive in the remaining quarters of 1998.
Foreign Currency Contracts
The Company enters into foreign currency forward exchange and option contracts
primarily as hedges of inventory purchases, sales and other intercompany
transactions denominated in foreign currencies to limit the effect of exchange
rate fluctuations on its results of operations and cash flows. The Company does
not enter into contracts for speculative purposes. Gains and losses related to
firm commitments, which qualify for hedge accounting, are deferred and are
recognized in the results of operations, balance sheet, and statement of cash
flows as part of the underlying transaction. Contracts that do not qualify for
hedge accounting are marked to market with gains and losses recognized in the
results of operations currently. If a derivative previously designated as a
hedge of a foreign currency commitment is terminated prior to the transaction
date of the related commitment, the resultant gain or loss is recognized at the
time of maturity of the original contract as a component of other expense, net.
Note 2 - Income Taxes
Consolidated pre-tax income consists of the following (in thousands):
For the Year
----------------------------------
1998 1997 1996
- ----------------------------------------------------------------------
US operations $ 57,965 $ 70,225 $206,668
Foreign operations 407,098 354,857 330,088
- ----------------------------------------------------------------------
$465,063 $425,082 $536,756
- ----------------------------------------------------------------------
The provision for current and deferred income taxes consists of the
following (in thousands):
For the Year
--------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------
Current
Federal $ 41,274 $ 55,056 $ 89,781
State 5,500 15,745 13,200
Foreign 98,800 80,395 64,165
- ------------------------------------------------------------------------------------
145,574 151,196 167,146
- ------------------------------------------------------------------------------------
Deferred
Federal 1,825 (14,283) 549
State (1,400) 3,640 1,000
Foreign (13,200) (7,962) (4,163)
- ------------------------------------------------------------------------------------
(12,775) (18,605) (2,614)
- ------------------------------------------------------------------------------------
Provision including extraordinary item 132,799 132,591 164,532
Benefit allocated to extraordinary item - 2,697 -
- ------------------------------------------------------------------------------------
Total provision for income taxes $132,799 $135,288 $164,532
- ------------------------------------------------------------------------------------
Deferred income taxes are provided principally for net operating loss
carryforwards, certain reserves, depreciation, employee compensation-related
expenses and certain other expenses that are
Mattel, Inc. and Subsidiaries 39
recognized in different years for financial statement and income tax purposes.
The Company's deferred income tax assets (liabilities) were comprised of the
following (in thousands):
As of Year End
---------------------
1998 1997
- ----------------------------------------------------------------------------------------
Operating loss and tax credit carryovers $ 96,410 $102,713
Sales allowances and inventory reserves 83,573 71,990
Deferred compensation 36,123 27,680
Excess of tax basis over book basis 15,825 15,545
Restructuring and integration charges 15,349 36,446
Postretirement benefits 12,842 12,645
Other 42,000 20,651
- ----------------------------------------------------------------------------------------
Gross deferred income tax assets 302,122 287,670
- ----------------------------------------------------------------------------------------
Excess of book basis over tax basis (14,392) (13,453)
Retirement benefits (15,570) (12,752)
Other (9,159) (10,816)
- ----------------------------------------------------------------------------------------
Gross deferred income tax liabilities (39,121) (37,021)
Deferred income tax asset valuation allowances (63,654) (64,077)
- ----------------------------------------------------------------------------------------
Net deferred income tax assets $199,347 $186,572
- ----------------------------------------------------------------------------------------
Management considered all available evidence and determined that a
valuation allowance of $63.7 million was required as of December 31, 1998 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 the Company will generate sufficient taxable income in the appropriate
carryforward periods to realize the benefit of the remaining net deferred tax
assets of $199.3 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):
For the Year
--------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
Provision at federal statutory rates $162,772 $148,779 $187,864
Increase (decrease) resulting from:
Losses without income tax benefit 1,821 1,468 835
Foreign earnings taxed at different
rates, including withholding taxes (44,301) (42,503) (30,517)
State and local taxes, net of federal benefit 2,665 12,287 9,230
Non-deductible restructuring costs - 20,150 -
Other 9,842 (4,893) (2,880)
- ------------------------------------------------------------------------------------------------
Total provision for income taxes $132,799 $135,288 $164,532
- ------------------------------------------------------------------------------------------------
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 the Company intends to permanently invest and upon which no deferred US
income taxes have been provided is $1.2 billion at December 31, 1998. 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, 1998, the Company has US net operating loss and credit
carryforwards for federal income tax purposes of $40.0 million and $8.2 million,
respectively. These carryforwards were generated primarily by Tyco prior to the
March 1997 merger with Mattel. These net operating loss carryovers expire during
the years 2007 to 2011, while $4.5 million of the tax credits have no expiration
date and $3.7 million of the tax credits will expire during the years 1999 to
2003. Both carryforwards are subject to an annual limitation, but the Company
expects to utilize the losses and credits before the expiration of their
carryforward periods.
In addition, the Company has a US net operating loss carryforward of
approximately $46.1 million, which was generated by Universal Matchbox Ltd. and
subsidiaries ("Matchbox") prior to their acquisition by Tyco. These loss
carryforwards expire during the years 2000 to 2005 and are subject to an annual
limitation, but the Company expects to utilize these losses before the
expiration of the carryforward periods. Accordingly, the goodwill reported in
the consolidated balance sheets attributable to Tyco's 1991 acquisition of
Matchbox has been reduced to reflect the adjustment related to the tax effect of
these losses.
Certain foreign subsidiaries have net operating loss carryforwards totaling
$119.9 million ($87.2 million with no expiration date, $32.6 million expiring
during the years 1999 to 2003, and $0.1 million expiring after 2003).
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 1998, 1997 and 1996, nonqualified stock options
exercised resulted in credits to additional paid-in capital totaling $38.7
million,$17.9 million and $26.3 million, respectively.
The Internal Revenue Service has completed its examination of the Company's
federal income tax returns through December 31, 1991.
Note 3 - Employee Benefits
The Company and certain of its subsidiaries have retirement plans covering
substantially all employees of these companies. Expense related to these plans
totaled $20.0 million, $19.0 million and $16.2 million in 1998, 1997 and 1996,
respectively.
Pension Plans
The Company 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 the
Company's pension plans, including those of foreign affiliates, was not
significant during the year.
The components of net pension income for the Fisher-Price Pension Plan,
based upon an October valuation date, for the years ended December 31, 1998,
1997 and 1996 are detailed below (in thousands):
For the Period Ended
--------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------
Service cost $ 2,508 $ 2,594 $ 2,671
Interest cost 10,929 10,327 8,866
Expected return on plan assets (18,949) (16,163) (14,784)
Amortization of:
Unrecognized prior service cost 108 134 150
Unrecognized net asset (2,569) (2,569) (2,569)
Plan amendment loss (gain) 1,154 (826) -
- ---------------------------------------------------------------------------------
Net pension income $ (6,819) $ (6,503) $ (5,666)
- ---------------------------------------------------------------------------------
Mattel, Inc. and Subsidiaries 40
Reconciliation of the funded status of Fisher-Price's domestic pension plan
to the related prepaid asset included in the consolidated balance sheets are as
follows (in thousands):
As of Year End
-----------------------
1998 1997
- -------------------------------------------------------------------------------------------------
Funded status of the plan $41,335 $60,809
Unrecognized net gain (4,438) (28,271)
Unrecognized prior service cost 1,366 1,474
Unrecognized net transition asset (1,285) (3,854)
- -------------------------------------------------------------------------------------------------
Prepaid pension asset $36,978 $30,158
- -------------------------------------------------------------------------------------------------
Reconciliation of the assets and liabilities of Fisher-Price's domestic
pension plan are as follows (in thousands):
As of Year End
-----------------------
1998 1997
- -------------------------------------------------------------------------------------------------
Change in Plan Assets
Plan assets at fair value, beginning of year $202,887 $157,507
Actual return on plan assets 2,793 51,218
Benefits paid (7,768) (5,838)
- -------------------------------------------------------------------------------------------------
Plan assets at fair value, end of year $197,912 $202,887
=================================================================================================
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year $142,078 $131,379
Service cost 2,508 2,594
Interest cost 10,929 10,327
Plan amendments 1,154 (826)
Actuarial loss 7,676 4,442
Benefits paid (7,768) (5,838)
- -------------------------------------------------------------------------------------------------
Projected benefit obligation, end of year $156,577 $142,078
=================================================================================================
For the Period
-------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Assumptions:
Weighted average discount rate 7.50% 7.75% 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%
- -------------------------------------------------------------------------------------------------
Other Retirement Plans
Domestic employees are eligible to participate in the Company's 401(k) savings
plans, which are defined contribution plans satisfying ERISA requirements. The
Company also maintains unfunded supplemental executive retirement plans which
are nonqualified defined benefit plans covering certain key executives. For
1998, 1997 and 1996, the accumulated and vested benefit obligations and related
expense of these plans were not significant.
Deferred Compensation and Excess Benefit Plans
The Company provides a deferred compensation plan which permits certain officers
and key employees to elect to defer portions of their compensation. The deferred
compensation plan, together with certain Company and employee contributions made
to an excess benefit plan, earn various rates of return. The liability for these
plans as of December 31, 1998 and 1997 was $47.8 million and $39.2 million,
respectively. The Company's contribution to these plans and the related
administrative expense were not significant to the results of operations during
any year.
In 1996, the Company purchased group trust-owned life insurance contracts
designed to assist in funding these programs. The cash surrender value of these
policies, valued at $40.7 million and $32.9 million as of December 31, 1998 and
1997, 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 financial
statements for the years ended December 31, 1998, 1997 and 1996 are as follows
(in thousands):
For the Year
----------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Service cost $ 218 $ 284 $ 344
Interest cost 2,416 2,465 2,496
- ---------------------------------------------------------------------------------------------------
Net postretirement benefit cost $2,634 $2,749 $2,840
- ---------------------------------------------------------------------------------------------------
Amounts included in the Company's consolidated balance sheets for this plan
are as follows (in thousands):
As of Year End
-----------------
1998 1997
- ---------------------------------------------------------------------------------------------------
Current retirees $25,140 $23,846
Fully eligible active employees 4,222 4,640
Other active employees 4,239 4,829
- ---------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 33,601 33,315
Unrecognized net loss (1,716) (1,213)
- ---------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $31,885 $32,102
- ---------------------------------------------------------------------------------------------------
Reconciliation of the liabilities of Fisher-Price's postretirement health
insurance plan are as follows (in thousands):
As of Year End
-----------------
1998 1997
- ---------------------------------------------------------------------------------------------------
Change in Accumulated Postretirement Benefit Obligation
Accumulated postretirement benefit obligation, beginning of year $33,315 $33,182
Service cost 218 284
Interest cost 2,416 2,465
Actuarial loss (gain) 503 (383)
Benefits paid, net of participant contributions (2,851) (2,233)
- ---------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation, end of year $33,601 $33,315
- ---------------------------------------------------------------------------------------------------
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.50% for 1998 and 7.75% for 1997 and 1996. For all
participants, the health care cost trend rate for expected claim costs was
assumed to be 5.50% in 1998 and remaining constant thereafter. A one percentage
point increase or decrease in the assumed health care cost trend rate for each
future
Mattel, Inc. and Subsidiaries 41
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, 1998 (in thousands):
One Percentage Point
--------------------
Increase Decrease
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $3,531 $(3,009)
Service and interest cost 256 (218)
- -------------------------------------------------------------------------------
The Company also maintains a contributory postretirement benefit plan for
domestic employees of Mattel. The ongoing costs and obligations associated with
the Mattel, Inc. plan are not significant to the Company's financial position
and results of operations during any year.
Incentive Awards
The Company's Long-Term Incentive Plan is a three-year plan available to certain
key executives of Mattel, Inc. Interim awards are paid annually based upon the
financial performance of the Company over a three-year period. Amounts charged
to operating expense in 1998, 1997 and 1996 under the current plan were $10.8
million, $13.8 million and $3.9 million, respectively.
The Company also has annual incentive compensation plans for officers and
key employees based on the Company's performance and subject to certain
approvals of the Compensation/Options Committee of the board of directors. For
the years ended December 31, 1998, 1997 and 1996, $11.7 million, $23.2 million
and $12.9 million, respectively, were charged to operating expense for awards
under the Mattel plans and $10.0 million, in 1996, for Tyco.
Prior to the merger, Tyco had a Long-Term Incentive Plan for certain senior
executives, under 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 $5.1 million was charged to
expense.
Note 4 - Seasonal Financing and Long-Term Debt
Seasonal Financing
The Company 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 1998
consisted of a committed unsecured facility providing a total of $1.0 billion in
seasonal financing. Within the facility, up to $700.0 million was a standard
revolving credit line available for advances and backup for commercial paper
issuances (a five-year facility that expires in 2003). Interest was charged at
various rates selected by the Company, ranging from market commercial paper
rates to the bank reference rate. The remaining $300.0 million (a five-year
facility that expires in 2003) was available for nonrecourse purchases of
certain trade accounts receivable of the Company by the commercial bank group
providing the credit line. The agreement required the Company to meet financial
covenants for consolidated debt-to-capital and interest coverage and the Company
was in compliance with such covenants during 1998. This agreement will continue
to be in effect during 1999. In addition, the Company 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, the
Company negotiates individual financing arrangements, generally with the same
group of banks that provided credit in the prior year. Foreign credit lines
total approximately $370 million, a portion of which is used to support letters
of credit. The Company expects to extend these credit lines throughout year 2000
and believes available amounts will be adequate to meet its seasonal financing
requirements. The Company also enters into agreements with banks of its foreign
affiliates for nonrecourse sales of certain of its foreign subsidiary
receivables.
Interest rates charged on the Company's working capital credit lines are
adjusted on a periodic basis; therefore, the carrying amounts of and other
short-term borrowings is summarized as follows (in thousands):
For the Year
-----------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
Balance at end of year
Domestic $ 79,175 $ - $ -
Foreign 54,831 17,468 28,924
Maximum amount outstanding
Domestic $1,076,600 $558,000 $567,000
Foreign 141,000 67,000 113,000
Average borrowing
Domestic $ 400,800 $178,000 $215,000
Foreign 58,000 40,000 72,000
Weighted average interest rate on average borrowing
Domestic (computed daily) 5.6% 5.7% 6.6%
Foreign (computed monthly) 20.3% 11.9% 11.6%
- ------------------------------------------------------------------------------------------
6-3/4% Senior Notes
In May 1993, the Company issued $100.0 million aggregate principal amount of 6-
3/4% Senior Notes maturing May 15, 2000. Interest is payable semiannually on the
fifteenth day of May and November. At December 31, 1998 and 1997, the bid prices
for the 6-3/4% Senior Notes, as provided by one of the underwriters, were
$1,014.00 and $1,011.85, respectively, based on a par value of $1,000.00.
6% and 6-1/8% Senior Notes
In July 1998, the Company issued $300.0 million aggregate principal amount of
senior notes, $150.0 million of which were 6% Senior Notes maturing July 15,
2003 and $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, 1998, the bid prices for the 6% and 6-1/8% Senior Notes, as
provided by one of the underwriters, was $1,004.40 and $998.65, respectively,
based on a par value of $1,000.00. The proceeds of these notes were used to
finance the acquisitions of Pleasant Company and Bluebird.
Mattel, Inc. and Subsidiaries 42
Medium-Term Notes ("MT Notes")
During the 1994 third quarter, the Company commenced a program for the issuance
of debt and equity securities under various shelf registration statements. In
November 1998, the Company filed its current universal shelf registration
statement allowing the issuance of up to $400.0 million of debt and equity
securities, all of which was available to be issued as of December 31, 1998. The
following is a summary of MT Notes currently outstanding (in millions, except
bid prices):
Bid Price (b)
Year Maturity ---------------------------------------------
Issued Amount Date Rate (a) 1998 1997
- -----------------------------------------------------------------------------------------------
1994 $ 80.5 10/99-12/04 8.00%-8.55% $1,018.75 - $1,112.70 1,031.50 - $1,117.80
1995 130.0 04/02-05/07 7.01%-7.65% 1,043.20 - $1,051.34 1,000.20 - 1,062.90
1997 310.0 11/04-07/12 6.70%-7.49% 1,021.59 - $1,073.45 1,022.58 - 1,064.90
1998 50.0 11/13 6.50%-6.61% 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 $1,000.00.
Mortgage Note
In 1990, the Company borrowed $45.0 million under a mortgage agreement secured
by its headquarters office facility in El Segundo, California. Interest accrues
at 10.15% and monthly principal and interest payments are due through December
2005. The fair value of the original mortgage note, estimated by discounting
future cash flows at interest rates currently available for debt with the same
credit rating, similar terms and maturity date, was approximately $51 million
and $57 million at December 31, 1998 and 1997, respectively.
7% Convertible Subordinated Notes ("7% Notes")
Upon consummation of the merger, the Company assumed Tyco's $16.0 million
obligation related to the 7% Notes. On September 10, 1997, the holder converted
all of the 7% Notes into 892.7 thousand shares of Mattel common stock.
10-1/8% Senior Subordinated Notes ("10-1/8% Notes")
Upon consummation of the merger, the Company assumed Tyco's $126.5 million
obligation related to the 10-1/8% Notes. On August 15, 1997, the Company
exercised its option and redeemed the 10-1/8% Notes at 103.797% of par together
with accrued interest. In the third quarter of 1997, the Company recognized a
pre-tax extraordinary loss of $7.3 million, and a related income tax benefit of
$2.7 million, as a result of the early retirement.
6-7/8% Senior Notes
The Company's $100.0 million of 6-7/8% Senior Notes issued in August 1992 were
repaid upon maturity on August 1, 1997.
Scheduled Maturities
The aggregate amounts of long-term debt and other obligations maturing in the
next five years are as follows (in thousands):
MT Mortgage
Senior Notes Notes Note Other Total
- ----------------------------------------------------------------------------------------
1999 $ - $30,000 $600 $2,900 $ 33,500
2000 100,000 - 600 600 101,200
2001 - 30,500 700 500 31,700
2002 - 30,000 800 200 31,000
2003 150,000 30,000 800 200 181,000
- ----------------------------------------------------------------------------------------
Note 5 - Stockholders' Equity
Preference Stock and Preference Share Purchase Rights
The Company is authorized to issue 20.0 million shares of $0.01 par value
preference stock, of which none is currently outstanding. There are 2.0 million
shares of $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 the Company's common stockholders. The
Rights may be exercised by their holders to purchase shares of the Company's
Series E Junior Participating Preference Stock upon the occurrence of a change
of control as defined in the 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 the Company.
Preferred Stock
The Company is authorized to issue 3.0 million shares of $1.00 par value
preferred stock, of which 771.9 thousand shares were outstanding as of December
31, 1998 and 1997.
- Series C Mandatorily Convertible Redeemable Preferred Stock
("Series C Preferred Stock")
On June 28, 1996, Tyco received net proceeds of $92.7 million from the sale of
772.8 thousand shares of Series C Preferred Stock. Each share of Series C
Preferred Stock was converted into like Mattel preferred stock as a result of
the March 1997 merger. The par value and liquidation preference of the Series C
Preferred Stock are $1.00 and $125.00 per share, respectively. Dividends are
cumulative and payable in cash on the first day of each calendar quarter at the
rate of $10.3125 per annum. Series C Depositary Shares ("Depositary Shares"),
each representing one twenty-fifth of a share of Series C Preferred Stock,
totaling 19.3 million shares, were sold by the depositary as part of the above
offering at an issue price of $5.00 per share. Each Depositary Share was
converted into a like Mattel depositary share as a result of the March 1997
merger.
Shares of the Series C Preferred Stock (and the related Depositary Shares)
are convertible, at the option of the holders, at any time prior to July 1, 2000
into Mattel common stock at a rate of 0.40064 common shares for each Depositary
Share, subject to adjustment under certain conditions. The Company, at its
option, may redeem the Series C Preferred Stock (and the related Depositary
Shares) at any time on or after July 1, 1999 for a number of Mattel common
shares equal to the call price (which is initially set at $5.103 per Depositary
Share and declines at specified times to
Mattel, Inc. and Subsidiaries 43
$5.000 per Depositary Share as of June 30, 2000) divided by the current market
price of Mattel common stock (as defined in the Certificate of Designations) or
0.40064 common shares for each Depositary Share, whichever is greater. On July
1, 2000, shares of the Series C Preferred Stock (and the related Depositary
Shares) are mandatorily convertible into 0.54301 Mattel common shares for each
Depositary Share.
The Series C Preferred Stock entitles the holders of Depositary Shares to
vote (at the rate of 0.48876 common shares for each Depositary Share) with the
holders of the Company's common stock as a single class on all matters on which
the holders of the Company's common stock may vote.
- Series B Voting Convertible Exchangeable Preferred Stock
("Series B Preferred Stock")
During 1994, Tyco sold 47.6 thousand shares of Series B Preferred Stock to a
private investment group. Each share of Series B Preferred Stock was converted
into like Mattel preferred stock as a result of the March 1997 merger. Until
April 15, 1996, Tyco paid dividends in the form of additional shares of Series B
Preferred Stock. Dividends issued in shares in lieu of cash during 1996 were
valued at $1.7 million (or 1.6 thousand shares). 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.
Common Stock
In May 1998, the stockholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation that increased the number of
shares of authorized common stock from 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 the Company's stock option plans, warrant exercises, and
other general corporate purposes.
Stock Compensation Plans
- - Stock Option Plans
In May 1996, the stockholders of the Company approved the Mattel 1996 Stock
Option Plan. Under this plan, incentive stock options, nonqualified stock
options, stock appreciation rights, nonvested stock awards, and shares of common
stock may be granted to officers, key employees, and other persons providing
services to the Company. In addition, nonqualified stock options may be granted
to members of the Company's board of directors who are not employees of the
Company.
Generally, options are exercisable contingent upon the grantees' continued
employment with the Company. Nonqualified stock options are granted at not less
than 100% of the fair market value of the Company's common stock on the date of
grant, generally vest at the rate of 25% per year of service, and usually expire
within ten years from the date of grant. The 1996 Stock Option Plan provides
that up to 1.5% of Mattel's outstanding common stock as of the first day of each
calendar year will be available for awards under the plan. Grants made to
individual participants cannot exceed 1.0 million shares in any single calendar
year. On February 4, 1999, the Company'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 the
Company. The aggregate number of shares of common stock available for grants
under the 1996 Stock Option Plan may not exceed 50.0 million shares. This plan
expires on December 31, 2005. The Company's previous plans, the 1982 and 1990
Stock Option Plans, expired on April 14, 1992 and December 31, 1996,
respectively. All outstanding awards under these plans continue to be
exercisable under the terms of their respective grant agreements.
The fair value of Mattel options granted during 1998, 1997 and 1996 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:
1998 1997 1996
- -------------------------------------------------------------------------
Expected life (in years) 3.60 3.40 3.17
Risk-free interest rate 4.61% 5.69% 6.05%
Volatility factor 15.80% 17.40% 17.98%
Dividend yield 0.83% 0.86% 0.82%
- -------------------------------------------------------------------------
The weighted average fair value of Mattel options granted during 1998, 1997
and 1996 were $7.32, $4.86 and $5.12, respectively.
The following is a summary of stock option information and weighted average
exercise prices for Mattel's stock option plans during the year (options in
thousands):
1998 1997 1996
------------------------------------------------------------
Number Price Number Price Number Price
- ---------------------------------------------------------------------------------------------------
Outstanding at January 1 17,307 $21.73 13,310 $18.05 14,513 $14.27
Options granted 3,680 41.66 7,443 25.79 4,294 25.15
Options exercised (4,284) 17.80 (2,807) 14.89 (5,267) 13.48
Options canceled (628) 29.79 (639) 22.44 (230) 16.67
- ---------------------------------------------------------------------------------------------------
Outstanding at December 31 16,075 $27.02 17,307 $21.73 13,310 $18.05
===================================================================================================
Exercisable at December 31 5,645 $20.48 5,999 $16.29 5,263 $14.41
===================================================================================================
Available for grant at December 31 2,358 1,072 4,074
===================================================================================================
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
for Mattel stock options outstanding as of December 31, 1998 (options in
thousands):
Options Outstanding Options Exercisable
--------------------------- -------------------
Exercise Remaining
Price Ranges Number Life Price Number Price
- -------------------------------------------------------------------------------
$ 4.69 to $15.76 1,775 4.87 $14.50 1,775 $14.50
16.16 to 24.00 2,212 6.59 18.96 1,263 17.98
24.70 to 25.50 2,199 7.08 24.72 806 24.73
25.75 to 25.75 5,372 8.10 25.75 1,311 25.75
26.13 to 41.38 1,400 8.23 30.76 490 27.55
42.00 to 42.00 3,117 9.10 42.00 - -
- -------------------------------------------------------------------------------
$ 4.69 to $42.00 16,075 7.60 $27.02 5,645 $20.48
- -------------------------------------------------------------------------------
Mattel, Inc. and Subsidiaries 44
Prior to the merger, Tyco had various incentive and non-qualified stock
option plans that provided benefits for eligible participants. Effective with
the March 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).
In December 1993, restricted stock awards totaling 927.7 thousand shares
were granted to key Mattel executives. During 1996, 244.1 thousand shares were
forfeited and returned to the Company. On January 1, 1997, restrictions on the
remaining 683.6 thousand shares lapsed. Compensation expense of $2.8 million was
charged to income in 1996. In addition, as a result of the forfeiture, $6.6
million of compensation expense that was recognized in previous periods was
reversed in 1996.
- - 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 the Company's stockholders at the May 1998 meeting.
Under this plan, premium price options may be granted to officers and other key
employees of the Company. Grants made to individual participants cannot exceed
4.5 million shares in any three consecutive calendar years. Participants in this
plan are not eligible to receive grants under the 1996 Stock Option Plan until
the year 2001.
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 the Company'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, the Company'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 the
Company, bringing the aggregate number of shares of common stock available for
grant under this plan to 24.0 million shares. This plan expires on December 31,
2002.
Options to purchase 1.0 million shares and 17.7 million shares of common
stock were granted during 1998 and 1997, respectively. No options were canceled,
forfeited or exercisable during these periods. Shares available for grant under
this plan were 2.3 million and 3.3 million as of December 31, 1998 and 1997,
respectively.
The fair value of premium price options granted during 1998 and 1997 has
been estimated using the Black-Scholes pricing model. The following assumptions
were used in determining fair value:
1998 1997
- -------------------------------------------------------------------------
Expected life (in years) 5.00 5.00
Risk-free interest rate 5.80% 6.33%
Volatility factor 25.50% 24.10%
Dividend yield 0.83% 0.86%
- -------------------------------------------------------------------------
The fair value of options granted during 1998 and 1997 was $5.10 and $4.79
for 25% premium price options and $4.92 and $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 for premium price options outstanding as
of December 31, 1998 (options in thousands):
Options Outstanding
- ---------------------------------------------------------------------
Number Remaining Life Price
- ---------------------------------------------------------------------
8,894 3.85 $42.31
8,767 3.85 44.87
500 4.54 50.46
500 4.54 53.83
- ---------------------------------------------------------------------
18,661 $44.04
- ---------------------------------------------------------------------
- - Compensation Cost
Both Mattel and Tyco adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized in the results of
operations for nonqualified stock options granted under these plans during the
years ended December 31, 1998, 1997 and 1996. Had compensation cost for
nonqualified stock options been determined based on their fair value at the date
of grant consistent with the method of accounting prescribed by SFAS No. 123,
the Company's net income and earnings per share would have been reduced as
follows (amounts in millions except per share data):
For the Year Ended
-------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
Net income
Stock option plans $15.7 $ 14.3 $ 7.0
Premium price stock option plan 21.1 - -
- ------------------------------------------------------------------------------
Income per share
Basic $0.13 $ 0.05 $ 0.02
Diluted 0.12 0.05 0.02
- ------------------------------------------------------------------------------
The pro forma effect on the Company's 1998, 1997 and 1996 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
The Company currently has outstanding warrants exercisable into 751.4 thousand
shares of the Company's common stock at an exercise price of approximately $4.77
per share. These warrants expire on June 30, 2000.
Mattel, Inc. and Subsidiaries 45
Disney Warrant
In June 1996, the Company entered into a licensing agreement with Disney
Enterprises, Inc. Pursuant to this agreement, the Company issued Disney a
warrant to purchase 3.0 million shares of the Company's common stock at an
exercise price of $27.375 per share. This warrant cannot be exercised prior to
April 2, 1999 and expires no later than April 2, 2004. The warrant's fair value
of $26.4 million was determined using the Black-Scholes pricing model, assuming
an expected life of eight years, a dividend yield of 0.88%, a risk-free interest
rate of 6.17%, and a volatility factor of 27.60%.
The fair value of the warrant is amortized as a component of royalty
expense when the related properties are introduced over the period the related
revenues are recognized. During 1998 and 1997, $3.2 million and $1.1 million,
respectively, was recognized in the results of operations related to this
warrant.
Common Stock Repurchase Plan
Mattel's common stock repurchase plan, initiated in May 1990, provides for the
repurchase of common shares to fund the Company's stock option plans. The number
of shares to be repurchased is authorized on an annual basis by the board of
directors based upon anticipated reissuance needs. During 1998, 1997, and 1996,
Mattel repurchased 9.7 million, 6.5 million, and 10.0 million shares,
respectively.
Dividends and Capital Transactions
A regular quarterly cash dividend has been declared by the Mattel board of
directors on the Company's common stock since the second quarter of 1990. The
board of directors increased the quarterly cash dividend from $0.07 per common
share to $0.08 per common share in the second quarter of 1998. Tyco was
precluded from paying cash dividends on its common stock for the year ended
December 31, 1996 due to limitations set forth in its various debt agreements.
Note 6 - Commitments and Contingencies
Leases
The Company routinely enters into noncancelable lease agreements for commitments
in effect at December 31, 1998 (in thousands):
Capitalized Operating
Leases Leases
- ---------------------------------------------------------------
1999 $ 400 $ 37,900
2000 300 29,000
2001 300 19,600
2002 300 11,500
2003 300 7,800
Thereafter 9,600 5,600
- ---------------------------------------------------------------
$11,200(a) $111,400
- ---------------------------------------------------------------
(a) Includes $8.7 million of imputed interest.
Rental expense under operating leases amounted to $58.4 million,
$61.5 million and $58.1 million for 1998, 1997 and 1996, respectively, net
of sublease income of $0.5 million, $0.3 million and $0.5 million in 1998, 1997
and 1996, respectively.
Commitments
In the normal course of business, the Company enters into contractual
arrangements to obtain and protect the Company's right to create and market
certain 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 the Company's focus on expanding its
product lines through alliances with businesses in other industries, such as
television and motion picture entertainment companies.
The largest commitment involves the Company's 1991 agreement with The Walt
Disney Company. This licensing agreement, which contains annual minimum royalty
guarantees, permits the Company to use the Disney name and certain characters on
preschool and infant products through September 2002. In related agreements, the
Company participates in attractions and toy stores at three Disney theme parks
under agreements in effect through June 2002. Under these agreements, the
Company makes semi-annual payments to Disney.
In June 1996, the Company entered into a licensing agreement with Disney
Enterprises, Inc. for an expanded strategic alliance, which grants the Company
exclusive worldwide rights (with certain exceptions) to produce toys based on
all children-oriented Disney television and film properties introduced,
commencing summer 1997. The agreement spans three years, with the Company having
the right for up to two additional years to market merchandise from film
properties produced during the second and third years. The initial term of the
agreement may be renewed for an additional three-year period upon mutual
consent. This agreement contains minimum royalty guarantees that are contingent
upon the number and nature of the properties introduced by Disney. Commitments
for 1999 introductions are expected to approximate $19 million payable over a
three-year period. Future commitments could be up to $37.8 million per
introduction year. Pursuant to the agreement, the Company issued Disney a stock
warrant, valued at $26.4 million, to purchase 3.0 million shares of the
Company's common stock.
Licensing and related agreements provide for terms extending from 1999
through 2003 and contain provisions for future minimum payments as shown in the
following table (in thousands):
Minimum Payments
- ---------------------------------------------------------
1999 $127,000
2000 90,000
2001 88,000
2002 57,000
2003 9,000
- ---------------------------------------------------------
$371,000
- ---------------------------------------------------------
Mattel, inc. and Subsidiaries 46
Royalty expense for the years ended December 31, 1998, 1997 and 1996 was
$200.8 million, $194.1 million and $155.3 million, respectively.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million.
Foreign Currency Contracts
To limit the exposure associated with exchange rate movements, the Company
enters into foreign currency forward exchange and option contracts primarily as
hedges of inventory purchases, sales and other intercompany transactions
denominated in foreign currencies. These contracts generally have maturity dates
of up to 18 months. Gains or losses related to firm commitments, which qualify
for hedge accounting, are deferred and are recognized in the results of
operations as part of the underlying transaction. Contracts that do not qualify
for hedge accounting are marked to market with gains and losses recognized in
the results of operations currently. Had the Company not entered into hedges to
limit the effect of exchange rate fluctuations on results of operations and cash
flows, the favorable effect on 1998 pre-tax income would have approximated $5
million.
As of December 31, 1998 and 1997, the Company held the following contracts
to sell foreign currencies (in thousands):
1998 1997
------------------------------------------------
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------
Forwards $392,972 $394,340 $353,085 $351,169
Options - - 93,547 90,500
- -----------------------------------------------------------------------
$392,972 $394,340 $446,632 $441,669
- -----------------------------------------------------------------------
Fair value for forwards reflects the amount, based on dealer quotes, the
Company would receive at maturity for contracts involving the same currencies
and maturity dates, if they had been entered into as of year-end 1998 and 1997,
respectively. During 1998, the Company did not enter into any new option
contracts and no option contracts remained outstanding as of December 31, 1998.
As of December 31, 1997, the fair value for options reflects the amount of US
dollars the Company would receive from the current contracts, less the
respective year-end option value. The option value is determined based on dealer
quotes for contracts involving the same currencies and maturity dates.
As of December 31, 1998 and 1997, the Company held $189.1 million and
$362.1 million, respectively, of foreign currency forward exchange contracts to
purchase foreign currencies. The fair value of these contracts was $201.8
million and $346.5 million as of December 31, 1998 and 1997, respectively. Fair
value reflects the amount, based on dealer quotes, the Company would pay at
maturity for contracts involving the same currencies and maturity dates, if they
had been entered into as of year-end 1998 and 1997, respectively.
The following table summarizes the Company's foreign currency contracts by
major currency as of December 31, 1998 and 1997 (in thousands of US dollars):
1998 1997
-------------------------------------------
Buy Sell Buy Sell
- -------------------------------------------------------------------------------------------
US dollars $392,972 $189,122 $446,632 $362,083
German marks 19,119 144,660 19,179 73,977
Italian lira 20,014 68,358 38,277 53,161
Malaysian ringgits - - 53,304 -
Hong Kong dollars 55,829 - 148,084 2,527
French francs 27,435 9,105 - 52,756
British pounds sterling 6,548 66,856 32,548 72,580
Canadian dollars 16,144 18,794 22,608 -
Spanish pesetas 5,625 2,899 - 19,363
Dutch guilders 5,079 8,086 12,778 49,967
Japanese yen - 12,501 - 7,956
Australian dollars 4,988 21,610 6,398 -
Belgian francs - 11,641 - 60,038
Swiss francs 18,341 - 13,677 -
Mexican peso - 22,000 - 50,200
Indonesian rupiah 10,000 - 15,230 -
Other (under $5,000) - 6,462 - 4,107
- -------------------------------------------------------------------------------------------
$582,094 $582,094 $808,715 $808,715
- -------------------------------------------------------------------------------------------
In order to minimize the risk of counterparty non-performance, the Company
executes its foreign currency forward exchange and option contracts with
financial institutions believed to be credit-worthy, generally those that
provide the Company with its working capital lines of credit.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. The Company seeks to mitigate its exposure to market
risk by monitoring its currency exchange exposure for the year and partially or
fully hedging such exposure. In addition, the Company manages its exposure
through the selection of currencies used for international borrowings and
intercompany invoicing. The Company does not trade in financial instruments for
speculative purposes.
Litigation
- - Beaverton, Oregon
The Company 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 ("TCE"). The
Company immediately closed the water supply and self-reported the sample results
to the Oregon Department of Environmental Quality ("DEQ") and Oregon Health
Division. The Company also implemented an employee communication and medical
screening program.
In November 1998, the Company and another potentially responsible party
entered into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the facility, to propose an interim remedial
action measure and to continue the community outreach program to employees,
former employees and
Mattel, Inc. and Subsidiaries 47
surrounding landowners. It is not presently possible to estimate the cost to the
Company related to the DEQ's investigation and any subsequent orders for work.
- - Toys R Us
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc. The
administrative law judge made findings of fact and conclusions of law that the
toy retailer Toys R Us, Inc. had violated federal antitrust laws and entered
into vertical and horizontal arrangements with various toy manufacturers,
including Mattel, whereby the manufacturers would refuse to do business with
warehouse clubs, or would do business with warehouse clubs only on terms
acceptable to Toys R Us. On October 13, 1998, the Federal Trade Commission
issued an opinion and a final order affirming the findings and conclusions of
the administrative law judge. Toys R Us has now filed a notice of appeal in the
United States Court of Appeals for the Seventh Circuit.
Following the announcement of the administrative law judge's decision,
Mattel was named as a defendant, along with certain other toy manufacturers, in
a number of antitrust actions in various states related to the Toys R Us matter.
The Company has also been named as a defendant in a series of private treble
damage class actions under federal antitrust laws that have been filed in
various federal district courts.
Since May 1998, the Company has participated in settlement negotiations
being conducted with the aid of a mediator. In connection with a proposed
settlement, the Company recognized a $6.0 million pre-tax charge in the fourth
quarter of 1998. After related tax effects, the net $4.3 million charge impacted
1998 earnings by $0.01 per diluted share. The proposed settlement agreement
calls for the Company to make cash and toy contributions prior to November 1999.
Until such time as these matters are concluded in the various courts involved,
Mattel intends to vigorously defend itself in the litigation in which it is
named involving Toys R Us.
- - Greenwald
On October 13, 1995, Michelle Greenwald filed a complaint against the Company in
Superior Court of the State of California, County of Los Angeles. Ms. Greenwald
is a former employee of Mattel who was terminated in July 1995. Her complaint
sought $50 million in general and special damages, plus punitive damages, for
breach of oral, written and implied contract, wrongful termination in violation
of public policy and violation of California Labor Code Section 970. Ms.
Greenwald claimed that her termination resulted from complaints she made to
management concerning general allegations that the Company did not properly
account for sales and certain costs associated with sales and more specific
allegations that the Company failed to properly account for certain royalty
obligations to The Walt Disney Company. During 1996 and 1997, the Company's
motions for summary judgment on all areas of her complaint were granted. In
1998, Ms. Greenwald filed a notice of appeal, which is scheduled to be
considered in March 1999. The Company intends to defend the action vigorously,
including her appeal.
- - Pending Business Combination
During December 1998, a total of six separate purported class action complaints
were filed by several stockholders of Learning Company in the Court of Chancery
of the State of Delaware in and for New Castle County against Learning Company
and its board of directors for alleged breaches of fiduciary duties in
connection with the proposed merger. The six complaints have since been
consolidated. The consolidated complaint seeks the certification as a class of
all Learning Company stockholders, an injunction against the merger, rescission
if the merger is consummated, damages, costs and disbursements, including
attorneys' fees. The consolidated complaint alleges that Learning Company's
board of directors breached their fiduciary duties to Learning Company's
stockholders by, among other things, failing to conduct due diligence sufficient
to have discovered material, adverse information concerning Mattel's anticipated
operational and financial results and agreeing to an exchange ratio that failed
to protect Learning Company stockholders against a decline in the value of
Mattel common stock. The consolidated complaint names Mattel as an additional
defendant, claiming that Mattel aided and abetted the alleged breaches of
fiduciary duty. Mattel will aggressively defend itself against the action and
will continue to pursue the merger.
- - Other Matters
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability, labor and
environmental cleanup, which are being addressed or defended in the ordinary
course of business. Management believes that any liability, which may
potentially result upon resolution of such matters, will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Note 7 - Acquisitions and Nonrecurring Items
Pending Business Combination
In December 1998, Mattel and Learning Company agreed to a merger. The stock-for-
stock transaction, which will be accounted for as a pooling of interests, is
subject to approval by the stockholders of both Mattel and Learning Company and
by certain regulatory agencies. Under the terms of the merger agreement, Mattel
will issue not less than 1.0 nor more than 1.2 shares of Mattel common stock for
each share of Learning Company common stock, depending on the actual exchange
ratio at the time of merger. In addition, each share of Learning Company Series
A Convertible Participating Preferred Stock will be converted into Mattel common
stock equal to the exchange ratio multiplied by 20. The outstanding share of
Learning Company Special Voting Stock will be converted into one share of Mattel
Special Voting Preferred Stock. Each outstanding Exchangeable Non-Voting Share
of Learning Company's Canadian subsidiary, Softkey Software Products Inc., will
remain outstanding, but will thereafter be exchangeable into a number of shares
of Mattel common stock equal to the exchange ratio. Given this range,
Mattel, Inc. and Subsidiaries 48
the merger would result in the issuance of approximately 102 million to 123
million Mattel common shares for Learning Company common shares. Depending on
the exchange ratio, the number of shares of Mattel common stock to be issued to
Learning Company's common and preferred stockholders, together with the Mattel
common stock to be issued upon the exchange of the exchangeable shares of
Learning Company's Canadian subsidiary, is expected to represent between
approximately 27% and 30% of Mattel's outstanding voting power after the merger.
The merger should be completed in the second quarter of 1999. However, if
the merger is terminated, under certain circumstances, Mattel will receive a
termination fee of up to $35.0 million. Furthermore, if Learning Company
subsequently enters into a business combination within twelve months with a
third party, then they will pay Mattel an additional termination fee of $75.0
million. In connection with the merger agreement, Mattel and Learning Company
entered into a stock option agreement in December 1998 which granted Mattel an
irrevocable option to purchase 15.7 million shares of Learning Company common
stock at a price calculated per the terms of the agreement. This stock option is
intended to increase the likelihood that the merger will be consummated in
accordance with the terms of the merger agreement.
The Company will assume all the debts, liabilities and duties of Learning
Company after the merger, including approximately $201 million aggregate
principal amount of 5-1/2% Senior Convertible Notes due 2000.
Acquisitions
During 1998, the Company acquired Pleasant Company and Bluebird, which were
accounted for using the purchase method of accounting. The results of operations
of the acquired companies have been included in the Company's consolidated
financial statements from their respective dates of acquisition.
In July 1998, the Company completed its acquisition of Pleasant Company, a
Wisconsin-based direct marketer of books, dolls, clothing, accessories, and
activity products included under the American Girl(R) brand name. The purchase
price, including investment advisor and other costs directly related to the
acquisition, was approximately $715 million. The excess of cost over the
estimated fair market value of tangible net assets acquired was approximately
$690 million. Total excess has been allocated to customer lists, a covenant not-
to-compete, and magazine subscription lists which are being amortized on a
straight-line basis over a 3 to 15 year period, with the remaining excess being
amortized on a straight-line basis over 40 years.
In June 1998, the Company acquired Bluebird, a company organized in the
United Kingdom, from which Mattel licensed the product designs for its Polly
Pocket(R) and Disney Tiny Collections brands, as well as the Polly Pocket(R)
trademarks. The aggregate purchase price, including investment advisor and other
directly related expenses, was approximately $80 million. Intercompany accounts
and transactions between Bluebird and the Company have been eliminated. The
excess of cost over the estimated fair market value of tangible net assets
acquired was approximately $60 million, which is being amortized on a straight-
line basis over 40 years.
Business Combination and Related Integration and
Restructuring Charge
In March 1997, the Company 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 the right to receive 0.48876 Mattel common
shares and resulted in the issuance of approximately 17 million shares. Tyco
restricted stock units and stock options outstanding as of the merger date were
exchanged for approximately 0.6 million Mattel common shares. In addition, each
share of Tyco Series B and Series C Preferred Stock was converted into like
Mattel preferred stock. Financial information for periods prior to the merger
reflect the retroactive restatement of the companies' combined financial
position and operating results.
In connection with the Tyco merger, the Company commenced an integration
and restructuring plan and recorded a $275.0 million pre-tax charge against
operations in March 1997. After related tax effects, the net $209.7 million
charge impacted 1997 earnings by $0.71 per diluted share. The plan consisted of
consolidating certain manufacturing and distribution operations, eliminating
duplicative marketing and administrative offices, terminating various
distributor and licensing arrangements and abandoning certain product lines. As
of December 31, 1998, the total integration and restructuring activity provided
for by this charge was substantially complete and amounts previously accrued had
been paid. The type and amount of charges incurred to date approximated the
amounts included in the provision.
Special Charges
In the 1998 third quarter, the Company recognized a $38.0 million pre-tax
charge related to a voluntary recall of certain Power Wheels(R) ride-on
vehicles. After related tax effects, the net $27.2 million charge impacted
1998 earnings by $0.09 per diluted share. 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.
In the 1998 fourth quarter, the Company recognized a $6.0 million
pre-tax charge related to the proposed settlement of the Toys R Us-related
antitrust litigation. After related tax effects, the net $4.3 million
charge impacted 1998 earnings by $0.01 per diluted share. The proposed
settlement agreement calls for cash and toy contributions by the Company
prior to November 1999.
Mattel, Inc. and Subsidiaries 49
During 1996, the Company received comments from the Securities and Exchange
Commission regarding its accounting for certain royalties and participation fees
in prior periods. The Company commenced an investigation with the assistance of
outside legal counsel and an independent accounting firm. A report issued as a
result of the investigation concluded that no evidence was found that the
Company accounted for sales and costs associated with sales in a manner that is
inconsistent with generally accepted accounting principles. The report also
concluded that the Company's accounting treatment for royalties, which was
adopted with the concurrence of Mattel's independent accountants, represented a
reasonable application of generally accepted accounting principles given the
facts and circumstances as they existed at the time the accounting decisions
were made. While the Company believes that its accounting treatment was correct,
Mattel recognized a catch-up adjustment in the amount of $21.8 million before
taxes in the fourth quarter of 1996.
Note 8 Segment Information - Restated
In the 1998 fourth quarter, the Company 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 the Company's reportable segments. This statement requires
disclosure of certain information by reportable segment, geographic area and
major customer.
In order to conform to the requirements of SFAS No. 131, the operating
segment disclosures have been restated as follows:
The table below presents information about segment revenues, operating
profit and assets. Mattel's reportable segments are separately managed business
units and include marketing and manufacturing. The marketing segment is divided
on a geographic basis between domestic and international. The domestic segment
is further divided into USA Toys, Fisher-Price/Tyco Preschool and Other. USA
Toys principally sells products in the Girls, Entertainment and Wheels
categories, while Fisher-Price/Tyco Preschool sells principally Infant and
Preschool products. The Other segment is principally involved in selling
specialty products in the Girls category. The international segment sells
products in all product categories. Operations, Mattel's manufacturing segment,
manufactures toy products, which are sold to the marketing segments based on
intercompany transfer prices. Such prices are based on manufacturing costs plus
a profit margin. Segment revenues do not include sales adjustments such as trade
discounts and other allowances. However, such adjustments are included in the
determination of segment profit from operations. Segment profit from operations
represents income before special charges, restructuring and integration charges,
interest expense, and provision for income taxes. The consolidated total profit
from operations presented in the following tables represents income 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.
Revenues
From Profit/(Loss)
External Intersegment From Segment Depreciation/
(In thousands) Customers Revenues Operations Assets Amortization*
- ------------------------------------------------------------------------------------------------------------
1998
Marketing
Domestic:
USA Toys $2,249,883 $ - $ 333,243 $ 571,976 $ 61,510
Fisher-Price/Tyco Preschool 902,018 - 97,813 279,773 41,376
Other segments 213,224 - 35,134 71,575 14,071
International 1,712,509 - 158,007 602,063 49,234
Operations 2,182 1,486,320 151,905 88,613 25,629
---------- ----------- --------- ---------- --------
Segment total 5,079,816 1,486,320 776,102 1,614,000 191,820
Elimination of intersegment
sales - (1,486,320) - - -
Sales adjustments (297,924) - - - -
Special charge - - (44,000) - -
Interest expense - - (110,833) - -
Corporate and other - - (156,206) (46,592) 23,085
---------- ----------- --------- ---------- --------
Consolidated total $4,781,892 $ - $ 465,063 $1,567,408 $214,905
========== =========== ========= ========== ========
1997
Marketing
Domestic:
USA Toys $2,388,988 $ - $ 485,879 $ 588,154 $ 51,358
Fisher-Price/Tyco Preschool 1,030,906 - 87,742 337,680 43,926
International 1,733,605 - 218,659 538,099 45,024
Operations 2,018 1,552,029 144,058 73,048 32,145
---------- ----------- --------- ---------- --------
Segment total 5,155,517 1,552,029 936,338 1,536,981 172,453
Elimination of intersegment
sales - (1,552,029) - - -
Sales adjustments (320,901) - - - -
Restructuring and
integration - - (275,000) - -
Interest expense - - (90,130) - -
Corporate and other - - (146,126) (16,721) 17,458
---------- ----------- --------- ---------- --------
Consolidated total $4,834,616 $ - $ 425,082 $1,520,260 $189,911
========== =========== ========= ========== ========
1996
Marketing
Domestic:
USA Toys $2,088,009 $ - $ 398,633 $ 527,821 $ 44,453
Fisher-Price/Tyco Preschool 920,581 - 84,045 228,793 36,105
International 1,819,487 - 179,826 586,277 50,218
Operations 9,796 1,586,885 146,233 83,323 27,492
---------- ----------- --------- ---------- --------
Segment total 4,837,873 1,586,885 808,737 1,426,214 158,268
Elimination of intersegment
sales - (1,586,885) - - -
Sales adjustments (302,541) - - - -
Interest expense - - (100,226) - -
Corporate and other - - (171,755) (33,096) 23,075
---------- ----------- --------- ---------- --------
Consolidated total $4,535,332 $ - $ 536,756 $1,393,118 $181,343
========== =========== ========= ========== ========
*Included in depreciation and amortization are charges for tooling. Such
charges are allocated among segments based on a percentage of relative sales.
The 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
-----------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Girls $2,125,800 $2,217,400 $2,102,500
Infant and Preschool 1,684,200 1,739,900 1,516,000
Wheels 713,300 590,700 487,900
Entertainment 480,100 421,700 440,100
Other 76,416 185,817 291,373
-----------------------------------------------------
5,079,816 5,155,517 4,837,873
Sales adjustments (297,924) (320,901) (302,541)
-----------------------------------------------------
Consolidated total $4,781,892 $4,834,616 $4,535,332
-----------------------------------------------------
The table below presents 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.
Long-Lived
(In thousands) Net Sales Assets
- --------------------------------------------------------------------------------
1998
United States $3,253,320 $1,301,237
International 1,528,572 634,011
---------- ---------
4,781,892 1,935,248
Corporate and other - 245,985
---------- ----------
Consolidated total $4,781,892 $2,181,233
========== ==========
1997
United States $3,263,917 $ 577,727
International 1,570,699 512,972
---------- ----------
4,834,616 1,090,699
Corporate and other - 229,625
---------- ----------
Consolidated total $4,834,616 $1,320,324
========== ==========
1996
United States $2,875,601 $ 582,038
International 1,659,731 595,884
---------- ----------
4,535,332 1,177,922
Corporate and other - 191,917
---------- ----------
Consolidated total $4,535,332 $1,369,839
========== ==========
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. Customers
accounting for more than 10% of the Company's consolidated net sales and related
accounts receivable are as follows:
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Worldwide sales for the year ended
Toys R Us $729.3 $859.5 $1,039.6
Wal-Mart 790.8 739.1 555.9
Accounts receivable as of December 31
Toys R Us $148.9 $260.7 $ 185.0
Wal-Mart 291.4 178.6 90.4
- ------------------------------------------------------------------------------------------------------
Mattel. Inc. and Subsidiaries 50
Note 9 - Quarterly Financial Information (Unaudited)
(In thousands, except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Net sales $ 705,164 $ 861,526 $1,672,120 $1,543,082
Gross profit 323,918 404,748 852,237 782,090
Advertising and promotion expenses 98,081 109,875 253,493 351,844
Other selling and administrative expenses 183,791 190,689 218,543 289,104
Amortization of intangibles 7,713 7,741 12,714 13,761
Special charges (a) - - 38,000 6,000
Income before income taxes 17,756 84,617 279,486 83,204
Net income 12,669 60,384 199,665 59,546
Preferred stock dividend requirements (1,990) (1,990) (1,990) (1,990)
Net income applicable to common shares 10,679 58,394 197,675 57,556
Basic income per common share:
Net income $ 0.04 $ 0.20 $ 0.68 $ 0.20
Weighted average number of common shares 293,048 293,433 291,870 287,630
Diluted income per common share:
Net income $ 0.04 $ 0.20 $ 0.66 $ 0.20
Weighted average number of common and common equivalent shares 298,164 297,720 303,551 290,399
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
YEAR ENDED DECEMBER 31, 1997 (b)
Net sales $ 693,520 $ 972,656 $1,555,347 $1,613,093
Gross profit 322,811 458,837 800,277 818,075
Advertising and promotion expenses 102,626 131,713 244,231 300,569
Other selling and administrative expenses 185,286 192,707 198,767 220,192
Amortization of intangibles 8,122 8,092 8,033 7,932
Restructuring and integration charges (c) 275,000 - - -
Income (loss) before income taxes and extraordinary item (267,619) 107,944 317,755 267,002
Extraordinary item - loss on early retirement of debt - - (4,610) -
Net income (loss) (204,624) 75,634 219,045 195,129
Preferred stock dividend requirements (2,840) (2,837) (2,838) (1,990)
Net income (loss) applicable to common shares (207,464) 72,797 216,207 193,139
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.72) $ 0.25 $ 0.76 $ 0.66
Extraordinary item - loss on early retirement of debt - - (0.02) -
Net income (loss) $ (0.72) $ 0.25 $ 0.74 $ 0.66
Weighted average number of common shares 288,382 291,737 290,650 290,962
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ (0.72) $ 0.25 $ 0.73 $ 0.64
Extraordinary item - loss on early retirement of debt - - (0.02) -
Net income (loss) $ (0.72) $ 0.25 $ 0.71 $ 0.64
Weighted average number of common and common equivalent shares 288,382 296,609 306,870 306,053
Dividends declared per common share $ 0.06 $ 0.07 $ 0.07 $ 0.07
Common stock market price:
High $ 29.25 $ 35.25 $ 35.75 $ 41.38
Low 24.00 24.00 32.38 33.38
- -------------------------------------------------------------------------------------------------------------------------------
(a) Represents 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 proposed Toys R
Us-related antitrust litigation settlement.
(b) Financial information for the first quarter of 1997 has been restated
retroactively for the effects of the March 1997 merger with Tyco, accounted
for as a pooling of interests.
(c) Represents a nonrecurring charge for transaction, integration and
restructuring costs related to the merger with Tyco.
Mattel, Inc. and Subsidiaries 51
Note 10 - Supplemental Financial Information
As of Year End
-------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------------
Inventories include the following:
Raw materials and work in process $ 42,851 $ 48,620
Finished goods 541,507 380,224
- ---------------------------------------------------------------------------
$584,358 $428,844
===========================================================================
Prepaid expenses and other current assets
include the following:
Deferred income taxes $178,060 $170,626
Other 99,888 75,903
- ---------------------------------------------------------------------------
$277,948 $246,529
===========================================================================
Short-term borrowings include the following:
Commercial paper $ 78,000 $ -
Notes payable 56,006 17,468
- ---------------------------------------------------------------------------
$134,006 $ 17,468
===========================================================================
Accrued liabilities include the following:
Advertising and promotion $147,551 $144,020
Mattel restructuring and Tyco integration 33,497 108,581
Royalties 99,674 79,304
Other 370,291 297,540
- ---------------------------------------------------------------------------
$651,013 $629,445
===========================================================================
For the Year
-------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Selling and administrative expenses
include the following:
Research and development $178,001 $156,350 $147,174
- --------------------------------------------------------------------------------
Supplemental disclosure of cash
flow information:
Cash paid during the year for:
Income taxes $ 93,936 $105,812 $107,944
Interest 103,627 94,320 99,019
Noncash investing and financing activities:
Issuance of stock warrant - - 26,444
Conversion of 7% Notes - 16,034 -
- --------------------------------------------------------------------------------
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. The Company is required to adopt this
statement for its fiscal year beginning January 1, 2000. Management believes the
adoption of this statement will not have a material impact on the Company's
consolidated financial position or results of operations.
Mattel, Inc. and Subsidiaries 52
Management Report on Responsibility
- --------------------------------------------------------------------------------
for Financial Reporting
Management is responsible for the preparation of the Company's consolidated
financial statements and the related financial and non-financial information
appearing in this annual report. The financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, present fairly the Company's financial position, results of
operations and cash flows. The financial statements necessarily contain some
amounts that are based on the best estimates and judgments of management.
The Company maintains accounting and internal control systems which
management believes are adequate to provide reasonable assurance, in relation to
reasonable cost, as to the integrity and reliability of the financial statements
and as to protection of assets from unauthorized use or disposition. The
selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures, and a
program of internal audit are important elements of these control systems.
The Company's internal auditors are directed to examine the adequacy and
effectiveness of the Company's system of internal accounting, administrative and
operational controls. They conduct formal and systematic reviews to determine
that operations are adequately controlled and to assure that assets are
effectively safeguarded.
The board of directors has appointed an audit committee, composed entirely
of nonemployee directors. The committee meets regularly with financial
management, internal auditors and the independent accountants to review
accounting control, auditing and financial reporting matters.
PricewaterhouseCoopers LLP, independent accountants, have been retained to
audit the Company's consolidated financial statements. They conduct a review of
internal accounting controls to the extent required by generally accepted
auditing standards and perform such tests and related procedures as they deem
necessary to arrive at an opinion on the fairness of the financial statements.
/s/ Harry J. Pearce
Harry J. Pearce
Chief Financial Officer
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Mattel, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Tyco Toys, Inc. and its
subsidiaries, which statements reflect net sales of $720,954,000 for the year
ended December 31, 1996. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Tyco Toys, Inc. and its
subsidiaries, is based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
As discussed in Note 8 to the consolidated financial statements, segment
information for the years 1998, 1997 and 1996 has been restated to present USA
Toys, Fisher-Price/Tyco Preschool, International and Operations as reportable
segments.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 1, 1999, except as to Note 8 for which the date is May 28, 1999
Mattel, Inc. and Subsidiaries 53
Directors and Officers
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Jill E. Barad (1) (5)
Chairman and Chief Executive Officer, Mattel, Inc.
Dr. Harold Brown (4) (5)
Senior Managing Director, E.M. Warburg, Pincus & Co., LLC
Tully M. Friedman (1) (6)
Founding Partner and Chairman, Friedman & Fleischer, LLC
Joseph C. Gandolfo (5)
President, Worldwide Manufacturing Operations, Mattel, Inc.
Ronald M. Loeb (3) (6)
Retired Partner, Irell & Manella
Ned Mansour (6)
President, Corporate Operations and General Counsel, Mattel, Inc.
Andrea L. Rich (3) (6)
President and Chief Executive Officer, Los Angeles County Museum of Art
William D. Rollnick (1) (2) (3)
Retired Chairman, Genstar Rental Electronics, Inc.
Pleasant T. Rowland
Vice Chairman, Mattel, Inc. and President, Pleasant Company
Christopher A. Sinclair (2) (4)
President and Chief Executive Officer, Quality Food Centers
John L. Vogelstein (1) (2) (3) (6)
Vice Chairman of the Board, President, and Director, E.M. Warburg, Pincus &
Co., LLC
(1) Member, Executive/Finance Committee
John L. Vogelstein, Chairman
(2) Member, Compensation/Options Committee
John L. Vogelstein, Chairman
(3) Member, Audit Committee
William D. Rollnick, Chairman
(4) Member, Pension Committee
Christopher A. Sinclair, Chairman
(5) Member, Foundation Committee
Dr. Harold Brown, Chairman
(6) Member, Nominations/Corporate Governance Committee
Ronald M. Loeb, Chairman
CORPORATE OFFICERS
Jill E. Barad
Chairman and Chief Executive Officer
Pleasant T. Rowland
Vice Chairman, Mattel and President, Pleasant Company
Joseph C. Gandolfo
President, Worldwide Manufacturing Operations
Ned Mansour
President, Corporate Operations and General Counsel
Francesca Luzuriaga
Executive Vice President, Worldwide Business Planning and Resources
Harry J. Pearce
Chief Financial Officer
Glenn Bozarth
Senior Vice President, Corporate Communications
Fermin Cuza
Senior Vice President, International Trade and Worldwide Government Affairs
Kevin M. Farr
Senior Vice President and Corporate Controller
John T. Phippen
Senior Vice President and Chief Information Officer
William Stavro
Senior Vice President and Treasurer
BUSINESS UNIT EXECUTIVES
Astrid Autolitano
President, Mattel International
Matthew C. Bousquette
President, Boys/Entertainment
Adrienne Fontanella
President, Girls/Barbie
Neil B. Friedman
President, Fisher-Price brands
David Haddad
President, Mattel Media
Mattel, Inc. and Subsidiaries 54
Corporate Information
- --------------------------------------------------------------------------------
Transfer Agent and Registrar
Mattel, Inc. Common Stock
BankBoston, N.A.
c/o EquiServe Limited Partnership
Depositary
Mattel, Inc. Depositary Shares, each representing one twenty-fifth
of a share of Series C Mandatorily Convertible Redeemable Preferred Stock
BankBoston, N.A.
c/o EquiServe Limited Partnership
Note Trustees
Mattel, Inc. 6-3/4% Senior Notes due May 15, 2000
Mattel, Inc. 6% Senior Notes due July 15, 2003
Mattel, Inc. 6-1/8% Senior Notes due July 15, 2005
Mattel, Inc. Medium-Term Notes
Chase Manhattan Bank and Trust Company National Association
101 California Street, Suite 2725
San Francisco, California 94111
Stock Exchange Listings
Mattel, Inc. Common Stock and Mattel, Inc. Preference Share
Purchase Rights
New York Stock Exchange and Pacific Exchange, Inc.
Mattel, Inc. Depositary Shares
New York Stock Exchange
Stockholder Administration
Inquiries relating to stockholder accounting records, stock
transfer, dividends (including dividend reinvestment) and direct
stock purchase should be directed to:
BankBoston, N.A.
c/o EquiServe Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
Telephone numbers:
888-909-9922 (DRIP information only)
800-730-4001 (stockholder information)
Website: www.equiserve.com
Common Stockholders
As of March 1, 1999, there were approximately 48,000 holders of record of
Mattel, Inc. common stock.
Annual Meeting
The Annual Meeting of Stockholders will be held June 3, 1999 at
10:00 a.m. at the Manhattan Beach Marriott, Manhattan Beach, California.
Form 10-K
Mattel's Annual Report to the Securities and Exchange Commission on Form 10-K
for the year ended December 31, 1998 is available upon request by writing to the
Secretary of the Company, 333 Continental Boulevard, El Segundo, California
90245-5012.
Trademark Legends
Barbie, Fisher-Price, Hot Wheels, Matchbox, Tyco, American Girl, Mattel
Media, View-Master, Generation Girl, My Design, Polly Pocket, Power Wheels,
See 'N Say, X3 Microscope and Me2Cam are trademarks of Mattel, Inc.
Disney characters: (C) Disney; Winnie the Pooh: (C) Disney. Based on the "Winnie
the Pooh" works. Copyright A.A. Milne and E.H. Shepard; Mulan: (C) Disney;
Disney's Tarzan: (C) 1999 Edgar Rice Burroughs, Inc. and Disney Enterprises,
Inc. Tarzan owned by Edgar Rice Burroughs, Inc. and used by permission; A Bug's
Life and Toy Story 2: (C) Disney/Pixar; Sesame Street Muppets: (C) 1999 Jim
Henson Productions, Inc. Sesame Street and the Sesame Street sign are registered
trademarks of Children's Television Workshop; Magna Doodle is a trademark
licensed from Pilot Corporation of America; Nickelodeon, Nick Jr., Rugrats,
Blue's Clues and all related titles, logos and characters are trademarks of
Viacom International Inc. (C) 1999 Viacom International Inc.; Ferrari models
licensed by Ferrari; Nascar is a registered trademark of The National
Association for Stock Car Auto Racing, Inc.; CAT and Caterpillar are registered
trademarks of Caterpillar Inc. (C) 1999 Caterpillar Inc.; Cabbage Patch Kids:
(C) 1999 Original Appalachian Artworks, Inc. Cabbage Patch Kids, logo and
related trademarks are trademarks of and licensed from Original Appalachian
Artworks, Inc.; Frank Sinatra: (C) 1999 Sheffield Enterprises, Inc. and Bristol
Productions Ltd. Partnership Inc.; Elizabeth Taylor: (C) 1999 Interplanet
Products, Limited; Lucille Ball: Images of Lucille Ball are used with permission
of Desilu, too, LLC; Elvis Presley is a registered trademark of Elvis
Presley Enterprises, Inc.; Audrey Hepburn: Licensed by the Audrey Hepburn
Estate; Microsoft and Windows are registered trademarks of Microsoft Inc.; Intel
is a registered trademark of Intel Corporation; Playstation is a trademark of
Sony Computer Entertainment Inc.; Nintendo and Game Boy are trademarks of
Nintendo of America, Inc.; UCLA is a trademark of The Regents of the University
of California; The Learning Company is a trademark of The Learning Company,
Inc.; National Geographic is a trademark of National Geographic Society;
American Greetings is a trademark of American Greetings Corporation; Mustang
trademark used under license from Ford Motor Company. All other product names
and associated designs mentioned or shown in this annual report are trademarks
and copyrighted properties of their respective owners.