EXHIBIT 99.2
Mattel, Inc. and Subsidiaries
Supplementary Consolidated Balance Sheets
March 31, March 31, Dec. 31,
(In thousands) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 242,078 $ 576,652 $ 469,213
Accounts receivable, net 1,069,006 1,093,839 1,150,051
Inventories 647,559 577,602 644,270
Prepaid expenses and other current assets 417,936 344,602 371,772
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 2,376,579 2,592,695 2,635,306
- -------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 34,763 28,730 35,113
Buildings 268,909 201,400 271,580
Machinery and equipment 580,179 526,466 569,428
Capitalized leases 21,406 24,485 23,271
Leasehold improvements 102,440 90,802 98,400
- -------------------------------------------------------------------------------------------------------------------------
1,007,697 871,883 997,792
Less: accumulated depreciation 435,598 392,841 422,020
- -------------------------------------------------------------------------------------------------------------------------
572,099 479,042 575,772
Tools, dies and molds, net 187,339 165,400 187,349
- -------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 759,438 644,442 763,121
- -------------------------------------------------------------------------------------------------------------------------
Other Noncurrent Assets
Intangibles, net 1,455,827 770,238 1,484,634
Other assets 275,066 240,900 264,324
- -------------------------------------------------------------------------------------------------------------------------
$4,866,910 $4,248,275 $5,147,385
=========================================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with The Learning Company, Inc.
("Learning Company"), accounted for as a pooling of interests. See Note 13.
Mattel, Inc. and Subsidiaries
Supplementary Consolidated Balance Sheets (Continued)
March 31, March 31, Dec. 31,
(In thousands, except share data) 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Short-term borrowings $ 324,435 $ 53,254 $ 199,006
Current portion of long-term liabilities 33,401 24,298 33,666
Accounts payable 242,548 273,355 362,467
Accrued liabilities 523,586 527,329 748,837
Income taxes payable 276,106 179,798 299,058
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,400,076 1,058,034 1,643,034
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Senior notes 600,955 387,650 600,955
Medium-term notes 540,500 520,500 540,500
Mortgage note 42,856 43,437 43,007
Other 155,415 148,226 149,086
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,339,726 1,099,813 1,333,548
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, Series A $0.01 par value, $200.00
liquidation preference per share, 0.8 million shares
authorized, issued and outstanding 8 8 8
Preferred stock, Series C $1.00 par value, $125.00
liquidation preference per share, 0.8 million shares
authorized, issued and outstanding 772 772 772
Special voting preferred stock $1.00 par value, $10.00
liquidation preference per share, one share authorized,
issued and outstanding, representing the voting rights
of 5.1 million, 4.9 million, and 5.2 million outstanding
exchangeable shares, respectively - - -
Common stock $1.00 par value, 1.0 billion shares
authorized; 405.4 million shares, 383.7 million shares,
and 405.1 million shares issued, respectively 405,403 383,683 405,114
Additional paid-in capital 1,847,263 1,651,715 1,845,222
Deferred compensation (11,933) - (12,265)
Treasury stock at cost; 14.2 million shares, 6.2 million
shares, and 14.3 million shares, respectively (494,007) (207,695) (495,347)
Retained earnings 605,362 504,755 625,197
Accumulated other comprehensive loss (225,760) (242,810) (197,898)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,127,108 2,090,428 2,170,803
- -----------------------------------------------------------------------------------------------------------------------------
$4,866,910 $4,248,275 $5,147,385
=============================================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 13.
2
Mattel, Inc. and Subsidiaries
Supplementary Consolidated Statements of Operations
For the
Three Months Ended
---------------------------------------
March 31, March 31,
(In thousands, except per share amounts) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Net Sales $878,959 $884,500
Cost of sales 440,462 444,612
- ---------------------------------------------------------------------------------------------------------------
Gross Profit 438,497 439,888
Advertising and promotion expenses 116,759 119,175
Other selling and administrative expenses 259,494 242,092
Amortization of intangibles 23,009 49,600
Charge for incomplete technology - 40,000
Restructuring and other charges 3,889 15,230
Interest expense 29,130 23,094
Other income, net (4,038) (2,147)
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 10,254 (47,156)
Provision for income taxes 5,205 8,801
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) 5,049 (55,957)
Less: preferred stock dividend requirements 1,990 1,990
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Shares $ 3,059 $(57,947)
===============================================================================================================
Basic Income (Loss) Per Common Share
Net income (loss) $ 0.01 $ (0.15)
===============================================================================================================
Weighted average number of common shares 396,480 376,364
===============================================================================================================
Diluted Income (Loss) Per Common Share
Net income (loss) $ 0.01 $ (0.15)
===============================================================================================================
Weighted average number of common and common
equivalent shares 422,264 376,364
===============================================================================================================
Dividends Declared Per Common Share $ 0.08 $ 0.07
===============================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 13.
3
Mattel, Inc. and Subsidiaries
Supplementary Consolidated Statements of Cash Flows
For the
Three Months Ended
--------------------------------------
March 31, March 31,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income (loss) $ 5,049 $ (55,957)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Noncash restructuring and integration charges - 4,000
Depreciation 48,208 44,585
Amortization 23,541 49,965
Charges for incomplete technology - 40,000
Increase (decrease) from changes in assets and liabilities:
Accounts receivable 54,930 109,167
Inventories (14,736) (107,886)
Prepaid expenses and other current assets (19,227) (5,441)
Accounts payable, accrued liabilities and income taxes payable (357,512) (355,605)
Other, net (13,727) (4,012)
--------- ---------
Net cash flows used for operating activities (273,474) (281,184)
--------- ---------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (27,218) (26,045)
Purchases of other property, plant and equipment (20,522) (44,989)
Proceeds from sale of investments 7,218 -
Payment for acquisitions, net of cash acquired - (128,029)
Proceeds from sale of property, plant and equipment 3,291 11,379
Software development costs (28,000) (6,156)
Other, net (502) (2,695)
--------- ---------
Net cash flows used for investing activities (65,733) (196,535)
--------- ---------
Cash Flows From Financing Activities:
Short-term borrowings, net 135,950 702
Proceeds from issuance of special warrants - 134,346
Payments of long-term debt (330) (6,266)
Exercise of stock options including related tax benefit 3,854 104,642
Purchase of treasury stock - (32,339)
Payment of dividends on common and preferred stock (22,952) (24,521)
Other, net (771) (3,329)
--------- ---------
Net cash flows from financing activities 115,751 173,235
Effect of Exchange Rate Changes on Cash (3,679) (4,115)
--------- ---------
(Decrease) in Cash (227,135) (308,599)
Cash at Beginning of Period 469,213 883,903
Effect of Broderbund's excluded results - 1,348
--------- ---------
Cash at End of Period $ 242,078 $ 576,652
========= =========
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 13.
4
Mattel, Inc. and Subsidiaries
Notes to Supplementary Consolidated Financial Information
1. The accompanying unaudited supplementary consolidated financial statements
and related disclosures have been prepared in accordance with generally
accepted accounting principles applicable to interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments considered necessary for a fair
presentation of Mattel, Inc. and its subsidiaries' ("the Company") financial
position and interim results as of and for the periods presented have been
included. Financial data for all periods presented reflect the retroactive
effect of the merger, accounted for as a pooling of interests, with The
Learning Company, Inc. consummated in May 1999 (see Note 13). Certain
amounts in the financial statements for prior periods have been reclassified
to conform with the current period's presentation. Because the Company's
business is seasonal, results for interim periods are not necessarily
indicative of those which may be expected for a full year.
2. The financial information included herein should be read in conjunction with
the Company's consolidated financial statements and related notes in its
1998 Annual Report to Stockholders filed on Forms 10-K and 10-K/A and the
Company's supplementary consolidated financial statements and related notes
for the years ended December 31, 1998, 1997 and 1996 filed on Form 8-K on
June 11, 1999.
3. Accounts receivable are shown net of allowances of $135.9 million (March 31,
1999), $73.0 million (March 31, 1998), and $125.0 million (December 31,
1998).
4. Inventories are comprised of the following:
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Raw materials and work in progress $ 64,700 $ 59,213 $ 48,473
Finished goods 582,859 518,389 595,797
- -----------------------------------------------------------------------------------------------------------------------------
$647,559 $577,602 $644,270
=============================================================================================================================
5. Intangibles, net include the following:
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Goodwill, net $1,432,091 $647,000 $1,335,183
Other 23,736 123,238 149,451
- ------------------------------------------------------------------------------------------------------------------------------
$1,455,827 $770,238 $1,484,634
=============================================================================================================================
5
6. Senior notes include the following:
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
5-1/2% due 2000 $200,955 $287,650 $200,955
6-3/4% due 2000 100,000 100,000 100,000
6% due 2003 150,000 - 150,000
6-1/8% due 2005 150,000 - 150,000
- -----------------------------------------------------------------------------------------------------------------------------
$600,955 $387,650 $600,955
=============================================================================================================================
7. Comprehensive (loss) income is as follows:
For the Three Months Ended
-------------------------------------
March 31, March 31,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------
Net income (loss) $ 5,049 $(55,957)
Unrealized (loss) gain on securities (3,876) 161
Currency translation adjustments (23,986) (32,505)
- ------------------------------------------------------------------------------------------------
Total comprehensive (loss) income $(22,813) $(88,301)
================================================================================================
8. Net cash flows from operating activities include cash payments for the
following:
For the Three Months Ended
---------------------------------------------
(In thousands) March 31, 1999 March 31, 1998
- -------------------------------------------------------------------------------------------------------------------
Income taxes $23,376 $57,904
Interest 20,886 8,316
- -------------------------------------------------------------------------------------------------------------------
9. In the current quarter, the board of directors declared cash dividends of
$0.08 per common share, compared to $0.07 per common share in the first
quarter 1998.
10. Basic income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
and exchangeable shares outstanding during each period. Earnings available
to common stockholders represent reported net income (loss) less preferred
stock dividend requirements.
Diluted income (loss) per common share is computed by dividing diluted
earnings available to common stockholders by the weighted average number of
common, exchangeable 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 conversion of dilutive securities. Diluted earnings per share
presented for the 1998 first quarter is the same as basic earnings per share
due to the Company's net loss position. Premium price stock options totaling
18.7 million, Series C preferred stock and convertible debt were excluded
from the calculation of diluted earnings per share in the 1999 first quarter
because they were anti-dilutive.
6
11. 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.
The table below presents information about segment revenues, operating
profit and assets. The Company's reportable segments are separately managed
business units and include toy marketing, toy manufacturing, and consumer
software sales and development. The toy marketing segment is divided on a
geographic basis between domestic and international. The domestic toy
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 toy segment is principally involved
in selling specialty products in the Girls category. The international toy
segment sells products in all categories. The consumer software segment is
comprised of educational and entertainment products developed and sold by
Learning Company on a worldwide basis. The Company's toy manufacturing
segment, Operations, 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. Toy 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 restructuring and other charges, interest expense, and provision for
income taxes. The consolidated total profit from operations presented in the
following tables represents income before income taxes as reported in the
supplementary consolidated statements of operations. The segment assets are
comprised of accounts receivable and inventories, net of applicable reserves
and allowances.
7
Revenues
From Profit/(Loss)
External Intersegment From Segment
(In thousands) Customers Revenues Operations Assets
- ----------------------------------------------------------------------------------------------------------
March 31, 1999
Marketing
Domestic:
USA Toys $319,241 $ - $ 18,937 $ 561,396
Fisher-Price/Tyco Preschool 140,323 - (350) 255,357
Other segments 44,383 - (6,710) 75,525
International 237,636 - (13,930) 503,576
Learning Company 186,843 - 43,423 268,547
Operations - 190,183 21,658 79,006
-------- --------- --------- ----------
Segment total 928,426 190,183 63,028 1,743,407
Elimination of intersegment sales - (190,183) - -
Sales adjustments (49,467) - - -
Restructuring and other charges - - (3,889) -
Interest expense - - (29,130) -
Corporate and other - - (19,755) (26,842)
-------- --------- --------- ----------
Consolidated total $878,959 $ - $ 10,254 $1,716,565
======== ========= ========= ==========
March 31, 1998
Marketing
Domestic:
USA Toys $331,579 $ - $ 43,651 $ 651,052
Fisher-Price/Tyco Preschool 183,270 - 11,483 308,228
International 235,619 - (7,529) 511,678
Learning Company 179,336 - (42,980) 151,912
Operations 992 293,109 24,619 73,912
-------- --------- --------- ----------
Segment total 930,796 293,109 29,244 1,696,782
Elimination of intersegment sales - (293,109) - -
Sales adjustments (46,296) - - -
Restructuring and other charges - - (15,230) -
Interest expense - - (23,094) -
Corporate and other - - (38,076) (25,341)
-------- --------- --------- ----------
Consolidated total $884,500 $ - $ (47,156) $1,671,441
======== ========= ========= ==========
8
The toy marketing segments sell a broad variety of children's toy products,
which are grouped into four major categories: Girls, Infant and Preschool,
Entertainment and Wheels. Learning Company is a leading publisher of consumer
software for the home personal computer. The table below presents revenues
from external customers by category:
For the Three Months Ended
-----------------------------------------
March 31, March 31,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------
Girls $315,239 $276,394
Infant and Preschool 237,832 307,043
Wheels 118,128 93,370
Entertainment 63,571 58,735
Other 6,813 15,918
- ----------------------------------------------------------------------------------------
741,583 751,460
Sales adjustments (49,467) (46,296)
- ----------------------------------------------------------------------------------------
Toy category 692,116 705,164
Learning Company 186,843 179,336
- ----------------------------------------------------------------------------------------
Consolidated total $878,959 $884,500
========================================================================================
12. During 1998, the Company acquired Pleasant Company, Mindscape Inc., Bluebird
Toys PLC and Sofsource, Inc., each of 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 supplementary consolidated
financial statements from their respective dates of acquisition.
The unaudited pro forma results of operations for 1998 acquisitions
accounted for using the purchase method of accounting for the three-month
period ended March 31, 1998 are as follows:
Acquired Pro Forma
(In thousands, except per share data) Mattel Companies Combined
- -------------------------------------------------------------------------------------------------------------------
Net sales $884,500 $ 62,418 $ 946,918
Loss before extraordinary item (55,957) (66,235) (122,192)
Net loss (55,957) (66,235) (122,192)
Basic loss per share (0.15) (0.32)
Diluted loss per share (0.15) (0.32)
- -------------------------------------------------------------------------------------------------------------------
The amounts shown for acquired companies assumes that the acquisitions of
Pleasant Company, Mindscape, Inc., Bluebird Toys PLC, and Sofsource, Inc.
occurred on January 1, 1998. Pro forma adjustments have been made to reflect
the amortization of intangible assets and goodwill capitalized as a result
of the acquisitions, incremental interest expense that would have been
incurred as a result of financing the acquisition of Pleasant Company as of
January 1, 1998, and elimination of intercompany sales and margins related
to the acquisition of Bluebird Toys PLC.
9
13. Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998,
a merger was consummated between Mattel and Learning Company on May 13,
1999. The stock-for-stock transaction was approved by the stockholders of
both companies, after which Learning Company was merged with and into
Mattel, with Mattel being the surviving corporation. Each share of Learning
Company Series A Preferred Stock was converted into 20 shares of Learning
Company common stock just prior to the consummation of the merger. According
to the merger agreement, each outstanding share of Learning Company common
stock was then converted into the right to receive 1.2 shares of Mattel
common stock. As a result, approximately 126 million Mattel common shares
were issued in exchange for all shares of Learning Company common stock
outstanding as of the merger date. The outstanding share of Learning Company
special voting stock was converted into the right to receive one share of
Mattel Special Voting Preferred Stock. Each outstanding exchangeable non-
voting share of Learning Company's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but is now exchangeable into the right
to receive 1.2 shares of Mattel common stock.
This transaction has been accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect
retroactive restatement of the companies' combined financial position and
operating results. For periods preceding the merger, there were no material
intercompany transactions which required elimination from the combined
consolidated results of operations and there were no adjustments necessary
to conform the accounting practices of the two companies.
Selected financial information for the combining entities included in the
supplementary consolidated statements of operations for the three-month
periods ended March 31, is as follows:
For the Three Months Ended
-----------------------------------------
March 31, March 31,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------
Net sales
Mattel $692,116 $705,164
Learning Company 186,843 179,336
- ---------------------------------------------------------------------------------------------------
Combined $878,959 $884,500
===================================================================================================
Net income (loss)
Mattel $(17,856) $ 12,669
Learning Company (a) 22,905 (68,626)
- ---------------------------------------------------------------------------------------------------
Combined $ 5,049 $(55,957)
===================================================================================================
(a) The (benefit) provision for income taxes has been adjusted by $(0.6)
million and $3.7 million in 1998 and 1997, respectively, to reflect the
reduction of valuation allowances established in Learning Company's
historical financial statements resulting in the recognition of estimated
benefits of net operating losses incurred by Learning Company.
10
Mattel, Inc. and Subsidiaries
Supplementary Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary Statement
Certain expectations and projections regarding the future performance of Mattel,
Inc. and its subsidiaries ("the Company") discussed herein 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
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
Financial 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. and its
subsidiaries ("Learning Company") into Mattel (together with its subsidiaries
"Mattel") following the May 1999 merger, which may impede the Company's
ability to achieve savings or operating synergies from the merger
11
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
- - Potential inability of software products sold by the Company to properly
recognize and process date-sensitive information beyond January 1, 2000,
which may result in increased costs, lost sales or other negative
consequences resulting from customer dissatisfaction, including litigation or
other claims for damages
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, 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
- - Other factors that may be described from time to time in the Company's
filings with the Securities and Exchange Commission
Summary
You should read this discussion in conjunction with the Company's supplementary
consolidated financial statements included herein. This Supplementary
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the accompanying supplementary consolidated financial statements
have been prepared to reflect the retroactive effect of Mattel's merger with
Learning Company, consummated in May 1999. 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
each period presented. This discussion relates to the Company's financial
position and results of operations through March 31, 1999 and other than giving
retroactive effect to the merger, does not reflect any subsequent events. As
used herein, any reference to the "Company" reflects the combined Mattel and
Learning Company results. Any reference to "Mattel" or "Learning Company"
reflects the individual activities of either Mattel or Learning Company,
respectively. Unless the context clearly indicates otherwise, all financial
results described herein reflect the combined Mattel and Learning Company
results.
The Company designs, manufactures, and markets a broad variety of children's
products on a worldwide basis through both sales to retailers and direct to
consumers. Additionally, the Company develops and markets consumer software for
home personal computers. 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 categories:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
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), View-
Master(R), and Blue's Clues(R)
Boys - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and
Tyco(R) Radio Control
Entertainment - including Disney, Nickelodeon(R), games, and puzzles
Consumer Software - including Reader Rabbit(R), Carmen Sandiego(TM), The
Oregon Trail(R), Riven(R), The ClueFinders(TM), Kid Pix(R), CyberPatrol(R) and
Family Tree Maker(R)
12
Segment Information
The Company's reportable segments are separately managed business units and
include: toy marketing, toy manufacturing, and consumer software sales and
development. The toy marketing segment is divided on a geographic basis between
domestic and international. The domestic toy segment is further divided into USA
Toys, Fisher-Price/Tyco Preschool and Other. USA Toys principally sells products
in the Girls, Boys, and Entertainment categories, while Fisher-Price/Tyco
Preschool principally sells infant and preschool products. The Other toy segment
is principally involved in selling specialty products in the Girls category. The
international toy segment sells products in all categories. The consumer
software segment is comprised of educational and entertainment products
developed and sold by Learning Company on a worldwide basis. The Company's toy
manufacturing segment, Operations, manufactures toy products, which are sold to
the toy marketing segments. Financial information regarding the Company's
segments can be found in Note 11 to the supplementary consolidated financial
statements.
Results of Operations
The Company's business is seasonal, and, therefore, results of operations are
comparable only with corresponding periods. The following is a percentage
analysis of operating results:
For the
Three Months Ended
---------------------------------
March 31, March 31,
1999 1998
- --------------------------------------------------------------------------------------------------
Net sales 100% 100%
==================================================================================================
Gross profit 49.9% 49.7%
Advertising and promotion expenses 13.3 13.4
Other selling and administrative expenses 29.5 27.4
Amortization of intangibles 2.6 5.6
Charge for incomplete technology - 4.5
Restructuring and other charges 0.4 1.7
Other income, net (0.4) (0.2)
- --------------------------------------------------------------------------------------------------
Operating profit (loss) 4.5 (2.7)
Interest expense 3.3 2.6
- --------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1.2% (5.3)%
==================================================================================================
Net income for the first quarter of 1999 was $5.0 million or $0.01 per share as
compared to a net loss of $56.0 million or $0.15 per share in the first quarter
of 1998. Profitability in the first quarter of 1999 was negatively impacted by
higher amortization of intangibles and interest costs related to the Company's
1998 acquisitions. First quarter 1998 results of operations were negatively
impacted by a $40.0 million in-process technology write-off related to the
acquisition of Mindscape, Inc. in March 1998. Net sales in the first quarter of
1999 decreased slightly to $879.0 million, from $884.5 million in 1998. Sales
in the Girls category increased 14% largely due to $44.4 million in incremental
sales of American Girl(R) resulting from the July 1998 Pleasant Company
acquisition. Sales of Barbie(R) products increased 3% worldwide and 11%
domestically. Within the Boys category, sales of Wheels products increased 27%,
demonstrating
13
continued strength across Hot Wheels(R), Matchbox(R), and Tyco(R) Radio Control.
Sales of Entertainment products, including Disney and Nickelodeon(R), increased
8%. Sales in the Infant and Preschool category declined 23%, largely due to last
year's success of `Tickle Me Elmo.' This decrease was partially offset by a 9%
increase in sales of core Fisher-Price products. Sales of Learning Company
consumer software products increased 4%, mainly due to the acquisition
of Mindscape, Inc. and the launch of several new products such as
Reader Rabbit's(R) Complete Learn to Read System, All Star Typing(TM) 9-12,
and Bodyworks(R).
Sales to customers within the US decreased 1% and accounted for 73% of
consolidated sales in both the 1999 and 1998 first quarter. Sales to customers
outside the US increased 1% from the year ago quarter.
Gross profit, as a percentage of net sales, was 49.9% in first quarter of 1999
compared to 49.7% in 1998. As a percentage of net sales, advertising and
promotion expenses fell slightly from 13.4% in 1998 to 13.3% in 1999. Other
selling and administrative expenses increased from 27.4% to 29.5%. This increase
is being addressed through a business realignment, which we expect will bring
the Company's overhead costs back in line with 1997 levels. The planned
realignment is expected to include the closure of some of the Company's
facilities and a workforce reduction affecting over 3,000 positions, or more
than 10% of the Company's total employment. Amortization of intangibles
decreased by $26.6 million, mainly as a result of full amortization of
intangibles related to the acquisitions of Minnesota Educational Computing
Corporation and the Former Learning Company, partially offset by amortization of
intangibles resulting from the 1998 acquisitions of Pleasant Company, Sofsource,
Inc., Bluebird Toys PLC (`Bluebird'), and Mindscape, Inc.
Interest expense increased $6.0 million primarily due to increased short- and
long-term borrowings to finance the Company's 1998 acquisitions.
Financial Position
The Company's cash position as of March 31, 1999 was $242.1 million compared to
$576.7 million as of the first quarter 1998. The $334.6 million decline was
mainly due to cash consideration paid in connection with the 1998 acquisitions
of Pleasant Company, Mindscape, Inc., and Bluebird, partially offset by the
issuance of $300.0 million in senior notes and profitable 1998 operating
results. Cash decreased by $227.1 million since December 31, 1998 primarily due
to funding of operating activities. Accounts receivable, net declined by $24.8
million from the year ago quarter and $81.0 million from year-end. Inventory
balances increased $70.0 million from the 1998 quarter end, mainly due to the
inventory acquired as part of the Company's acquisitions. Property, plant and
equipment, net grew $115.0 million from the first quarter of 1998 mainly due to
assets acquired as part of acquisitions, and investments in the expansion of the
Company's toy manufacturing facilities located in Mexico. Intangibles, net
increased $685.6 million, compared to the year-ago quarter, to $1.46 billion due
to the Pleasant Company, Bluebird, and Sofsource, Inc. acquisitions.
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Short-term borrowings increased $271.2 million compared to the 1998 quarter end
due to cash consideration paid in connection with the 1998 acquisitions.
Compared to 1998 year end, short-term borrowings increased $125.4 million to
support seasonal needs. Current portion of long-term liabilities increased $9.1
million over the 1998 quarter end, primarily due to the reclassification of
$30.0 million in medium-term notes payable in 1999 from long-term debt.
Seasonal financing needs for the next twelve months are expected to be satisfied
through internally generated cash, issuance of commercial paper, issuance of
long-term debt, and use of the Company's various short-term bank lines of
credit.
A summary of the Company's capitalization is as follows:
(In millions) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ----------------------------------------------------------------------------------------
Senior notes $ 601.0 17% $ 387.7 12% $ 601.0 17%
Medium-term notes 540.5 16 520.5 16 540.5 16
Other long-term debt obligations 42.8 1 43.4 1 43.0 1
- ----------------------------------------------------------------------------------------
Total long-term debt 1,184.3 34 951.6 29 1,184.5 34
Other long-term liabilities 155.4 5 148.2 5 149.1 4
Stockholders' equity 2,127.1 61 2,090.4 66 2,170.8 62
- ----------------------------------------------------------------------------------------
$3,466.8 100% $3,190.2 100% $3,504.4 100%
========================================================================================
Total long-term debt increased as a percentage of total capitalization compared
to the year-ago quarter, mainly due to the issuance of $300.0 million in 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 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. Stockholders' equity increased $36.7 million since March 31,
1998, primarily due to profitable 1998 operating results and reissuance of
treasury stock for the exercise of nonqualified stock options by the Company's
employees, partially offset by the treasury stock purchases and dividend
declarations on common and preferred stock. Stockholder's equity declined $43.7
million from year end 1998 as a result of dividend declarations on common and
preferred stock.
Business Combination and Related Integration and Restructuring Charge
Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a
merger was consummated between Mattel and Learning Company on May 13, 1999. The
stock-for-stock transaction was approved by the stockholders of both companies,
after which Learning Company was merged with and into Mattel, with Mattel being
the surviving corporation. Each share of Learning Company Series A Preferred
Stock was converted into 20 shares of Learning Company common stock just prior
to the consummation of the merger. According to the merger agreement, each
outstanding share of Learning Company common stock was then converted into the
right to receive 1.2 shares of Mattel common stock. As a result, approximately
126 million Mattel common shares will be issued in exchange for all shares of
Learning Company common stock outstanding as of the merger date. The outstanding
share of Learning
15
Company special voting stock was converted into the right to receive one share
of Mattel Special Voting Preferred Stock. Each outstanding exchangeable non-
voting share of Learning Company's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but is now exchangeable into the right to
receive 1.2 shares of Mattel common stock.
In April 1999, Mattel announced that as a result of the May 1999 merger with
Learning Company and a planned realignment of Mattel's operations to reduce
overhead costs, the Company expects to incur a pre-tax charge of approximately
$300 million to $350 million against results of operations during the second
quarter of 1999. Mattel also announced that the planned realignment was
expected to include the closure of some of Mattel's facilities and a
workforce reduction affecting over 3,000 positions, or more than 10% of
Mattel's employees at that time. The planned realignment will consist of
consolidating some manufacturing and distribution operations, eliminating
duplicative facilities, and terminating various distributor and licensing
arrangements. Approximately $75 million of the charge is expected to be related
to merger transaction costs, approximately $90 million is expected to be related
to merger integration costs, and approximately $135 million to $185 million is
expected to be related to Mattel restructuring costs. The Company expects to
fund this restructuring through existing cash balances and internally generated
cash from operations. The Company expects the combined actions to result in cost
savings of approximately $50 million in 1999 and at least $400 million over the
following three years. However, the amount of expected cost savings are
preliminary estimates and the Company cannot assure that its actions will result
in these cost savings.
New Internet Venture
On April 15, 1999, the Company announced that it expects to initially spend
approximately $50 million to launch an Internet venture, which is expected to
result in the creation of a new subsidiary later this year, a portion of which
may be offered to the public. The Company expects that it will be able to offset
a portion of its investment in the Internet venture with the 1999 cost savings
from the realignment discussed above. The Company's goal is to create a premier
online destination and E-commerce site to better serve children and their
families. The Company's strategy to reach this goal is premised on attracting
consumers to its sites by bringing together the branded proprietary content of
both Mattel and Learning Company at one "Mattel.com" Web destination. The
Company expects to have over 80 websites and a database of approximately 25
million consumers.
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 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.
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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.
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 Mattel
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, Mattel's board of directors is regularly informed about the year 2000
issue both generally and as it may affect Mattel's business.
Mattel'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 Mattel's computer systems,
including all 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. Mattel has not engaged outside consultants, technicians
or other external resources to assist in formulating and implementing the
program.
Mattel'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) business interruption and contingency
planning.
Under the first two phases of the plan, Mattel has inventoried and evaluated all
operational, manufacturing and financial systems. 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,
Mattel established detailed plans and action steps required to address all
aspects of the year 2000 issue, including all code and system modifications
(phase 3). Mattel completed the awareness, inventory and code change phases of
the plan as scheduled prior to December 1998. Critical system verification and
testing (phase 4) for Mattel is expected to be complete by July 1999.
17
Mattel 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, Mattel 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. Mattel is actively
following-up with those customers and suppliers failing to reply to the initial
inquiry.
Learning Company was acquired by Mattel in May 1999 and therefore followed its
own year 2000 readiness plan prior to the merger. For purposes of this
Supplementary Management's Discussion and Analysis of Financial Condition and
Results of Operations which relates to the Company's financial condition and
results of operations through March 31, 1999, after giving effect to the merger,
the following discussion with respect to Learning Company's year 2000 plan and
readiness describes the status of such plan and its uncertainties through March
31, 1999. The Company is in the process of evaluating Learning Company's year
2000 plan and incorporating it into its own plan. The Company anticipates
describing the results of this effort in the future filings.
As of March 31, 1999, Learning Company was in the assessment stage of its plan.
For certain known critical internal systems, Learning Company had completed the
assessment phase of its plan. Learning Company had not yet determined a date by
which it expected to complete implementation for all the targeted areas, but it
intended to complete such implementation in advance of January 1, 2000. Learning
Company had been taking, and expected to continue to take actions, intended to
resolve year 2000 issues through planned replacement or upgrades of its internal
computer equipment and software systems.
Learning Company believed that a substantial portion of its remediation and
implementation efforts with respect to internal systems would be conducted in
connection with the integration of the businesses it acquired in 1998. In 1998
Learning Company acquired Mindscape, Inc., Sofsource, Inc., P.F. Magic, Inc.,
Broderbund, and Palladium Interactive, Inc. None of these companies had made
substantial progress in its own year 2000 readiness plans with respect to
internal systems or third parties. While Learning Company was in the process of
integrating these businesses into its year 2000 readiness plan, the addition of
these businesses complicated the Learning Company's year 2000 inventory,
assessment, remediation and implementation efforts. This effect is mitigated
somewhat as Learning Company intends in most instances to move, or in certain
cases has moved or is in the process of moving, most accounting, data
processing, telephone/PBX and other information technology processes of the
business to Learning Company's systems, which are to a greater extent already
year 2000 compliant.
The Company sells both Mattel and Learning Company software products as part of
its core businesses. All Mattel software products currently available for sale
to consumers and those products previously purchased by consumers are year 2000
compliant. Mattel software products manufactured for the Company by third-
parties under licensing agreements have been certified as year 2000 compliant by
such manufacturers.
Learning Company sold software products primarily for use in homes and schools,
and has sold over the last few years products that have since been discontinued
but may still be used by consumers. Additionally, products under development
were being designed to be year 2000 compliant. Learning Company was also in the
process of testing certain of its products sold in the past, for year 2000
compliance. Because Learning Company's products tend to have few time-sensitive
components, the resources necessary to test its products are not expected to be
significant. However, since Learning Company was still in the assessment phase
of its readiness plan with respect to products, it is difficult to estimate with
certainty the ultimate cost of its year 2000 plan with respect to products.
Contingency planning is being done on a worldwide basis by all business units.
Each business 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.
Mattel's contingency plans (phase 5) will be developed during the first half of
1999 and will be complete by July 1999. A contingency plan for Learning Company
has not yet been developed, but contingency plans will be instituted at the
completion of Learning Company's assessment phase.
As of March 31, 1999, the Company has spent approximately $9 million and expects
to incur a total of approximately $13 million in connection with addressing the
year 2000 issue. These costs include approximately $1 million incurred by
Learning Company and a total of approximately $2 million expected to be incurred
by Learning Company. 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.
While the Company is dedicating resources toward attaining year 2000 readiness,
there is no assurance that the Company will be successful in its efforts to
address all year 2000 issues. If all year 2000 issues are not properly
identified and assessed or the plan implemented timely, there can be no
assurance that the year 2000 issue will not materially adversely impact the
Company's results of operations, liquidity and financial position or adversely
affect the Company's relationships with customers, vendors or others. For
example, failure to achieve year 2000 readiness for the Company's internal
systems could delay its ability to manufacture and ship products or disrupt
customer service and technical support facilities. The Company also relies on
third parties such as manufacturing suppliers and vendors and large retail
customers. If these or other third parties experience year 2000 failures or
malfunctions there could be a material adverse impact on the Company's ability
to conduct ongoing operations. Additionally, the Company could incur increased
costs, lost sales or other negative consequences resulting from customer
dissatisfaction, including litigation if its products are not year 2000
compliant.
The above discussion regarding costs, risks and estimated completion dates for
the year 2000 is based on the Company's best estimates given information that is
available on March 31, 1999, and is subject to change. Actual results could
differ from these estimates.
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