SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
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MATTEL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-1567322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
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(Former name, former address and former fiscal year,
if changed since last report) None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Number of shares outstanding of registrant's common stock as of November 4, 1999
Common Stock - $1 par value - 420,777,356 shares
PART I -- FINANCIAL INFORMATION
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets
Sept. 30, Sept. 30, Dec. 31,
(In thousands) 1999 1998 1998
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Assets
Current Assets
Cash $ 92,714 $ 377,385 $ 469,213
Accounts receivable, net 2,000,868 1,898,943 1,150,051
Inventories 742,704 808,555 644,270
Prepaid expenses and other current assets 471,147 377,053 371,772
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Total current assets 3,307,433 3,461,936 2,635,306
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Property, Plant and Equipment
Land 35,580 37,138 35,113
Buildings 274,328 254,054 271,580
Machinery and equipment 600,951 583,386 569,428
Capitalized leases 23,271 23,362 23,271
Leasehold improvements 63,196 95,190 98,400
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997,326 993,130 997,792
Less: accumulated depreciation 459,772 433,822 422,020
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537,554 559,308 575,772
Tools, dies and molds, net 190,387 183,383 187,349
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Property, plant and equipment, net 727,941 742,691 763,121
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Other Noncurrent Assets
Intangible assets, net 1,411,603 1,501,903 1,484,634
Other assets 288,880 272,854 264,324
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$5,735,857 $5,979,384 $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 11.
2
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Sept. 30, Sept. 30, Dec. 31,
(In thousands, except share data) 1999 1998 1998
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Liabilities and Stockholder's Equity
Current Liabilities
Short-term borrowings $ 945,447 $ 917,228 $ 199,006
Current portion of long-term liabilities 133,285 13,769 33,666
Accounts payable 421,042 424,223 362,467
Accrued liabilities 792,830 822,121 748,837
Income taxes payable 194,162 280,257 299,058
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Total current liabilities 2,486,766 2,457,598 1,643,034
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Long-Term Liabilities
Medium-term notes 540,500 520,500 540,500
Senior notes 500,955 590,955 600,955
Mortgage note 42,542 43,154 43,007
Other 159,932 143,362 149,086
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Total long-term liabilities 1,243,929 1,297,971 1,333,548
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Stockholders' Equity
Preferred stock, Series A $0.01 par value, $200.00
liquidation preference per share, 0.8 million shares
authorized, issued and outstanding at September 30,
1998 and December 31, 1998, respectively - 8 8
Preferred stock, Series C $1.00 par value, $125.00
liquidation preference per share, 0.8 million shares
authorized, issued and outstanding at September 30,
1998 and December 31, 1998, respectively - 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 3.9 million, 5.3 million, and 5.2 million outstanding
exchangeable shares, respectively - - -
Common stock $1.00 par value, 1.0 billion shares
authorized; 432.8 million shares, 402.9 million shares,
and 405.1 million shares issued, respectively 432,766 402,900 405,114
Additional paid-in capital 1,739,226 1,810,203 1,845,222
Deferred compensation - (12,588) (12,265)
Treasury stock at cost; 11.8 million shares, 10.2 million
shares, and 14.3 million shares, respectively (389,551) (351,474) (495,347)
Retained earnings 458,524 588,924 625,197
Accumulated other comprehensive loss (235,803) (214,930) (197,898)
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Total stockholders' equity 2,005,162 2,223,815 2,170,803
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$5,735,857 $5,979,384 $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 11.
3
Mattel, Inc. and Subsidiaries
Consolidated Statement of Operations
For the For the
Three Months Ended Nine Months Ended
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Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands, except per share amounts) 1999 1998 1999 1998
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Net Sales $1,825,247 $1,884,843 $3,744,360 $3,802,852
Cost of sales 957,961 888,753 1,926,076 1,857,634
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Gross Profit 867,286 996,090 1,818,284 1,945,218
Advertising and promotion expenses 296,436 281,726 549,670 535,931
Other selling and administrative expenses 331,934 278,059 836,562 783,553
Amortization of intangibles 22,765 20,674 65,193 103,365
Charge for incomplete technology - - - 56,826
Restructuring and other charges - 97,088 348,889 133,205
Interest expense 41,019 42,346 102,463 83,609
Other (income) expense, net (846) 8,870 (8,845) (1,199)
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Income (Loss) Before Income Taxes 175,978 267,327 (75,648) 249,928
Provision (benefit) for income taxes 40,645 98,593 (11,696) 132,573
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Net Income (Loss) 135,333 168,734 (63,952) 117,355
Less: preferred stock dividend requirements - 1,990 3,980 5,970
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Net Income (Loss) Applicable to Common Shares $ 135,333 $ 166,744 $ (67,932) $ 111,385
=====================================================================================================================
Basic Income (Loss) Per Common Share
Net income (loss) $ 0.32 $ 0.42 $ (0.17) $ 0.29
=====================================================================================================================
Weighted average number of common shares 425,148 399,218 410,316 387,020
=====================================================================================================================
Diluted Income (Loss) Per Common Share
Net income (loss) $ 0.32 $ 0.39 $ (0.17) $ 0.27
=====================================================================================================================
Weighted average number of common and common
equivalent shares 429,455 435,123 410,316 419,870
=====================================================================================================================
Dividends Declared Per Common Share $ 0.09 $ 0.08 $ 0.26 $ 0.23
=====================================================================================================================
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 11.
4
Mattel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended
----------------------------------
Sept. 30, Sept. 30,
(In thousands) 1999 1998
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Cash Flows From Operating Activities:
Net (loss) income $ (63,952) $ 117,355
Adjustments to reconcile net (loss) income to net cash flows from
operating activities:
Noncash restructuring and integration charges 68,771 22,981
Depreciation 146,174 129,384
Amortization 67,537 105,272
Charges for incomplete technology - 56,826
(Decrease) increase from changes in assets and liabilities:
Accounts receivable (879,631) (610,494)
Inventories (110,756) (231,991)
Prepaid expenses and other current assets (122,402) (30,305)
Accounts payable, accrued liabilities and income taxes payable (7,609) 12,059
Deferred income taxes 9,605 (4,332)
Other, net 5,233 (2,489)
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Net cash flows used for operating activities (887,030) (435,734)
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Cash Flows From Investing Activities:
Purchases of tools, dies and molds (81,491) (82,865)
Purchases of other property, plant and equipment (71,936) (130,218)
Payment for acquisitions, net of cash acquired (5,664) (881,222)
Proceeds from sale of business and other property, plant and equipment 2,303 14,704
Investment in other long-term assets (20,859) (7,483)
Other, net (1,399) (1,591)
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Net cash flows used for investing activities (179,046) (1,088,675)
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Cash Flows From Financing Activities:
Short-term borrowings, net 760,751 826,675
Proceeds from issuance of notes - 300,000
Proceeds from issuance of special warrants - 134,346
Payments of long-term debt - (106,475)
Exercise of stock options including related tax benefit 71,981 140,800
Purchase of treasury stock (51,047) (198,268)
Payment of dividends on common and preferred stock (87,791) (72,539)
Other, net (1,777) (4,220)
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Net cash from financing activities 692,117 1,020,319
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Effect of Exchange Rate Changes on Cash (2,540) (2,428)
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(Decrease) in Cash (376,499) (506,518)
Cash at Beginning of Period 469,213 883,903
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Cash at End of Period $ 92,714 $ 377,385
============================================================================================================================
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 11.
5
Mattel, Inc. and Subsidiaries
Notes to Consolidated Financial Information
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The Learning
Company division's fiscal year is the 52 or 53 weeks ending on or after
December 31. Therefore, the financial results of the Learning Company
division included within the accompanying consolidated financial statements
and related disclosures are as of and for the periods ended October 2, 1999
and October 3, 1998. In the opinion of management, all adjustments
considered necessary for a fair presentation of Mattel, Inc. and its
subsidiaries' ("Mattel") financial position and interim results as of and
for the periods presented have been included. 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 11. Certain amounts in the financial statements for prior
periods have been reclassified to conform with the current period's
presentation. Because Mattel's business is seasonal, results for interim
periods are not necessarily indicative of those which may be expected for a
full year.
2. The financial information included herein should be read in conjunction with
Mattel's consolidated financial statements and related notes in its 1998
Annual Report to Stockholders filed on Forms 10-K and 10-K/A and its
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 $176.0 million (September
30, 1999), $79.3 million (September 30, 1998), and $125.1 million (December
31, 1998).
4. Inventories are comprised of the following:
(In thousands) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998
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Raw materials and work in progress $ 70,918 $ 69,417 $ 48,473
Finished goods 671,786 739,138 595,797
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$742,704 $808,555 $644,270
==========================================================================================================================
5. Intangibles, net include the following:
(In thousands) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998
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Goodwill, net $1,291,239 $1,343,461 $1,335,183
Other 120,364 158,442 149,451
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$1,411,603 $1,501,903 $1,484,634
==========================================================================================================================
6
6. Senior notes include the following:
(In thousands) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998
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5-1/2% due 2000 $200,955 $190,955 $200,955
6-3/4% due 2000 - 100,000 100,000
6% due 2003 150,000 150,000 150,000
6-1/8% due 2005 150,000 150,000 150,000
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$500,955 $590,955 $600,955
==========================================================================================================================
7. Comprehensive (loss) income is as follows:
For the Nine Months Ended
---------------------------------------------
(In thousands) Sept. 30, 1999 Sept. 30, 1998
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Net (loss) income $ (63,952) $117,355
Unrealized gain on securities:
Unrealized holding gains (losses) arising during the period 2,800 (425)
Less: reclassification adjustment for realized gains
included in net loss (11,143) -
Currency translation adjustments (29,562) (4,039)
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Total comprehensive (loss) income $(101,857) $112,891
=====================================================================================================================
8. Supplemental disclosure of cash flow information is as follows:
For the Nine Months Ended
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(In thousands) Sept. 30, 1999 Sept. 30, 1998
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Cash payments during the period:
Interest $91,334 $65,799
Income taxes 57,935 82,938
Noncash investing and financing activities during the period:
Common stock issued for acquisitions:
Settlement of earn-out agreements $ 5,547 $ 5,573
Sofsource, Inc. - 45,000
Mindscape, Inc. - 30,000
Conversion of 5-1/2% senior notes - 96,695
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9. In the current quarter, the board of directors declared cash dividends of
$0.09 per common share, compared to $0.08 per common share in the 1998 third
quarter.
10. Basic income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares and common shares obtainable upon the exchange of the exchangeable
shares of Mattel's Canadian subsidiary, Softkey Software Products Inc.,
outstanding during each period. Earnings available to common stockholders
represent reported net income (loss) less preferred stock dividend
requirements.
7
Diluted income (loss) per common share is computed by dividing diluted
earnings available to common stockholders by the weighted average number of
common shares, common shares obtainable upon the exchange of the
exchangeable shares of Mattel's Canadian subsidiary Softkey Software
Products Inc., and other common equivalent shares outstanding during each
period. The calculation of common equivalent shares assumes the exercise of
dilutive stock options and warrants, net of assumed treasury share
repurchases at average market prices, and conversion of dilutive preferred
stock and convertible debt, as applicable. 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 nine months ended September 30, 1999 is the same as basic
earnings per share due to Mattel's net loss position. Premium price stock
options totaling 18.6 million, other nonqualified stock options totaling
19.2 million and convertible debt were excluded from the calculation of
diluted earnings per share in the 1999 third quarter because they were anti-
dilutive. Premium price stock options totaling 18.7 million and convertible
debt were excluded from the calculation of diluted earnings per share in the
1998 third quarter because they were anti-dilutive. Premium price stock
options totaling 18.0 million, Series C preferred stock and convertible debt
were excluded from the calculation of diluted earnings per shares for the
nine months ended September 30, 1998 because they were anti-dilutive.
11. 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
each company, after which Learning Company was merged with and into Mattel,
with Mattel being the surviving corporation. Each share of Learning Company
Series A Preferred Stock was converted into 20 shares of Learning Company
common stock immediately prior to the consummation of the merger. Pursuant
to the merger agreement, each outstanding share of Learning Company common
stock was converted into 1.2 shares of Mattel common stock upon consummation
of the merger. As a result, approximately 126 million Mattel common shares
were issued in exchange for all shares of Learning Company common stock
outstanding as of the merger date. The outstanding share of Learning
Company special voting stock was converted into one share of Mattel Special
Voting Preferred Stock. Each outstanding exchangeable share of Learning
Company's Canadian subsidiary, Softkey Software Products Inc., remains
outstanding, but upon consummation of the merger became exchangeable for
1.2 shares of Mattel common stock.
This transaction 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.
8
Selected financial information for the combining entities included in the
consolidated statements of operations for the nine month period ended
September 30, 1998 is shown below. Although the merger was effective on May
13, 1999, interim financial information for the combining companies was not
available as of that date; therefore, information for and as of March 31,
1999 has been presented.
For the Period Ended
---------------------------------------
March 31, Sept. 30,
(In thousands) 1999 1998
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Net sales
Mattel $692,116 $3,238,810
Learning Company 186,843 564,042
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Combined $878,959 $3,802,852
===========================================================================
Net (loss) income
Mattel $(17,856) $ 272,718
Learning Company (a) 22,905 (155,363)
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Combined $ 5,049 $ 117,355
===========================================================================
(a) The (benefit) provision for income taxes has been adjusted by $(0.6)
million and $11.0 million in 1999 and 1998, 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.
12. During the second quarter of 1999, Mattel completed its merger with Learning
Company and finalized a previously announced plan of restructuring and
integration. These actions, along with other one-time events, resulted in a
non-recurring pre-tax charge against operations of $345.0 million, $267.0
million after tax or $0.65 per share. Of the total pre-tax charge,
approximately $276 million represents cash expenditures.
The restructuring and integration plan, expected to be substantially
complete by June 2000, provides for the consolidation and realignment of
Mattel's operations. The plan is aimed at leveraging global resources in
areas of manufacturing, marketing and distribution, eliminating duplicative
functions worldwide and achieving improved operating efficiencies. The
following are the major restructuring and integration initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of four higher cost manufacturing facilities.
9
Components of the restructuring and other non-recurring charges recorded in
the second quarter of 1999 and amounts incurred through September 30, 1999 are
as follows:
Total Charge Balance
June 30, Amount Sept. 30,
(In millions) 1999 Incurred 1999
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Severance and other compensation $108 $ 23 $ 85
Distributor, license and other contract terminations 57 39 18
Writedown of assets 42 42 -
Lease termination costs 22 - 22
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Total restructuring costs and asset writedowns 229 104 125
Merger-related transaction and other costs 86 73 13
Other non-recurring charges 30 12 18
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Total restructuring, asset writedowns and other
charges $345 $189 $156
===============================================================================================================
Severance and other compensation costs relate to the termination of
approximately 4,100 employees around the world. Approximately 3,200 of these
employees are hourly workers located in certain of Mattel's manufacturing
facilities, of which approximately 2,200 were employed in the manufacturing
facility in Kuala Lumpur, which ceased operations in September 1999. The
remainder of the work force reductions consists of downsizing sales and
marketing groups in the US, Europe and Asia-Pacific regions as well as the
elimination of duplicate administrative personnel following the
consolidation of back-office functions, the majority of which are in Europe.
As of September 30, 1999, approximately $23 million had been paid to nearly
2,500 terminated employees. Cash severance payments will extend beyond the
completion of the workforce reductions due to the severance payment options
available to affected employees.
Mattel terminated its sponsorship agreements related to certain attractions
for a total cost of $37.5 million, inclusive of the writeoff of related
capitalized costs. The cash portion of this charge was paid as of July 1999.
Mattel also recognized a $19.5 million charge, mainly related to settlements
for termination of certain foreign distributor agreements in conjunction
with the realignment of its sales and distribution network.
Mattel's restructuring plan resulted in the impairment of certain long-lived
assets related to the operations being closed. The sum of the undiscounted
future cash flows of these assets was not sufficient to cover the carrying
amount of these assets. As a result, these long-lived assets were written down
to fair market value and will be depreciated over their remaining useful
lives. Fair value of the impaired assets was determined by either third-party
appraisals or past experience in disposing of similar assets. Buildings and,
to the extent possible, equipment will be sold while the remainder of the
impaired assets will be abandoned when taken out of service. Nearly all of the
revenue-generating activities related to these assets will continue as a
result of more effective utilization of other assets. A significant portion of
the fixed asset writedowns is concentrated in the Operations and Learning
Company segments. Two of the four manufacturing facilities ceased production
during the third quarter of 1999. In addition, other asset writeoffs include
approximately $10 million of goodwill related to a recently acquired software
business, which was closed following the merger with Learning Company.
10
Lease termination costs include penalties imposed upon canceling existing
leases and future obligations under long-term rental agreements at
facilities being vacated following the merger and realignment.
Merger-related transaction costs consist of investment banking fees, legal,
accounting and printing costs, registration fees and other costs recognized
in connection with the merger. Also included in this amount are the
contractual change of control payments arising from the merger. The
majority of all merger-related transaction costs were paid during the
second quarter of 1999.
Other non-recurring charges include an additional $16.0 million related to
the October 1998 recall of Mattel's Power Wheels(R) vehicles and $14.0
million for environmental remediation costs related to a manufacturing
facility on a leased property in Beaverton, Oregon, based on the
completion and approval of the remediation plan and feasibility study.
13. On June 16, 1999, Mattel issued a notice to holders of its Series C
Mandatorily Convertible Redeemable Preferred Stock and to the holders of
the related Depositary Shares informing them of Mattel's optional
redemption of these securities on July 1, 1999. On that date, each share of
Series C Preferred Stock was redeemed in exchange for 10.015914 shares of
Mattel common stock, and each Depositary Share was redeemed in exchange for
0.400637 shares of Mattel common stock. Dividends on the Series C Preferred
Stock and the related Depositary Shares ceased to accrue on July 1, 1999.
14. During 1998, Mattel acquired Pleasant Company and Bluebird Toys PLC,
while Learning Company acquired Mindscape, Inc. and Sofsource, Inc. These
acquisitions were accounted for using the purchase method of accounting.
The results of operations of the acquired companies have been included in
Mattel's consolidated financial statements from their respective dates of
acquisition.
The unaudited pro forma results of operations for the 1998 acquisitions
accounted for using the purchase method of accounting for the nine month
period ended September 30, 1998 are as follows:
Acquired Pro Forma
(In thousands, except per share data) Mattel Companies Combined
- ---------------------------------------------------------------------------------------------------------------
Net sales $3,802,852 $ 103,862 $3,906,714
Income (loss) before extraordinary item 117,355 (102,175) 15,180
Net income (loss) 117,355 (102,175) 15,180
Basic income per share 0.29 0.02
Diluted income per share 0.27 0.02
- ---------------------------------------------------------------------------------------------------------------
11
The amounts shown for acquired companies assume 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.
15. Mattel'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 marketing segment is
further divided into USA Toys, US Fisher-Price/Tyco Preschool and Other.
USA Toys principally sells products in the Girls, Entertainment and Wheels
categories, while US 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
marketing 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. Mattel'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 (loss) from operations. Segment profit (loss) from
operations represents income before restructuring and other charges,
interest expense, and provision (benefit) for income taxes as reported in
the consolidated statements of operations. Segment assets are comprised of
accounts receivable and inventories, net of applicable reserves and
allowances.
Revenues For the Three Months Ended For the Nine Months Ended
------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
Toy Marketing
USA Toys $ 821,859 $ 841,880 $1,489,198 $1,569,583
US Fisher-Price/Tyco Preschool 307,552 298,723 637,666 673,765
Other segments 50,441 52,774 138,344 66,918
International 550,338 590,074 1,077,085 1,142,880
Learning Company 194,956 212,723 605,318 564,042
Operations 546,910 514,555 1,034,291 1,143,912
- ------------------------------------------------------------------------------------------------------------
Segment total 2,472,056 2,510,729 4,981,902 5,161,100
Elimination of intersegment sales (546,910) (514,154) (1,034,291) (1,141,786)
Sales adjustments (99,899) (111,732) (203,251) (216,462)
- ------------------------------------------------------------------------------------------------------------
Net sales $1,825,247 $1,884,843 $3,744,360 $3,802,852
============================================================================================================
12
Operating Profit (Loss) For the Three Months Ended For the Nine Months Ended
------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
Toy Marketing
USA Toys $ 160,912 $185,289 $ 216,452 $ 281,602
US Fisher-Price/Tyco Preschool 44,637 46,444 56,107 72,314
Other segments (10,302) (7,270) (34,592) (9,470)
International 83,166 105,448 67,884 110,018
Learning Company (132,548) 54,517 (22,296) 40,934
Operations 97,336 59,797 163,120 121,342
- ------------------------------------------------------------------------------------------------------------
Segment total 243,201 444,225 446,675 616,740
Restructuring and other charges - (97,088) (348,889) (133,205)
Charge for incomplete technology - - - (56,826)
Interest expense (41,019) (42,346) (102,463) (83,609)
Corporate and other (26,204) (37,464) (70,971) (93,172)
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 175,978 $267,327 $ (75,648) $ 249,928
============================================================================================================
Assets
Sept. 30, Sept. 30,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------
Toy Marketing
USA Toys $ 903,156 $1,039,917
US Fisher-Price/Tyco Preschool 388,090 439,425
Other segments 127,424 117,107
International 886,985 900,045
Learning Company 382,990 161,754
Operations 82,002 93,416
- ---------------------------------------------------------------------------------------------
Segment total 2,770,647 2,751,664
Corporate and other (27,075) (44,166)
- ---------------------------------------------------------------------------------------------
Accounts receivable and inventories, net $2,743,572 $2,707,498
=============================================================================================
16. Following Mattel's announcement on October 4, 1999, that it expected an
earnings shortfall at its Learning Company division in the third quarter of
1999, several of Mattel's stockholders filed purported class action
complaints in the United States District Courts for the Central District of
California, the Southern District of New York, and the District of
Massachusetts, naming Mattel and certain of its officers and directors as
defendants. The complaints generally allege, among other things, that
defendants made false or misleading statements that artificially inflated
the price of Mattel common stock by overstating the revenues and net income
of Mattel and Learning Company and by falsely representing that the Learning
Company merger would be immediately accretive to Mattel's 1999 and 2000
financial results.
In addition, a Mattel stockholder filed a derivative complaint on behalf and
for the benefit of Mattel in the Superior Court of the State of California,
County of Los Angeles. The complaint alleges that Mattel's directors
breached their fiduciary duties, wasted corporate assets and grossly
mismanaged Mattel in connection with Mattel's merger with Learning Company
and seeks both monetary and injunctive relief.
Mattel believes the lawsuits are without merit and intends to defend them
vigorously.
13
Mattel, Inc. and Subsidiaries
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 ("Mattel") discussed in this quarterly 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 Mattel'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", "project", "continue", "plans", "intends" or other
similar terminology. Management cautions you that the following factors, among
others, could cause Mattel'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 negatively affect the sales of Mattel'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 Mattel'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 Mattel's ability to successfully redesign,
restyle and extend existing core products and product lines and successfully
bring new products to market
- - Significant changes in the play patterns of children, whereby they are
increasingly attracted to more developmentally advanced products at younger
ages, which may affect brand loyalty and the perceived value of and demand
for Mattel's products
- - Possible weaknesses in economic conditions, both domestically and
internationally, which may negatively affect the sales of Mattel's products
and the costs associated with manufacturing and distributing these products
- - Further slowdown in the growth rate of sales in the CD-ROM market and
increased competitive pressure from the internet and other new technologies,
which may negatively affect the market for existing CD-ROM products
Financial Considerations
- - Currency fluctuations, which may affect Mattel's reportable income
- - Significant changes in interest rates, both domestically and internationally,
which may negatively affect Mattel's cost of financing both its operations
and investments
Merger-Related Risks
- - Difficulty integrating the operations of The Learning Company, Inc.
("Learning Company") into Mattel following the May 1999 merger, which may
impede Mattel's ability to achieve savings or operating synergies from the
merger
14
Year 2000 Compliance
- - Potential inability of computer systems or software products used by Mattel
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 Mattel, 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
- - Inability to successfully complete licensing and e-commerce deals in a timely
fashion, which may reduce Mattel's ability to realize the full value of its
intellectual property rights
- - Development of new technologies, including the Internet, which may create new
risks to Mattel's ability to protect its intellectual property rights
- - Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products, environmental activities or
trade restrictions, which may lead to increased costs or interruption in
normal business operations of Mattel
- - Current and future litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal business
operations of Mattel
- - Other factors and risks that may be described from time to time in Mattel's
public announcements and filings with the Securities and Exchange Commission
Summary
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.
Additionally, Mattel develops and markets consumer software for home personal
computers largely through its Learning Company division. Mattel's business is
dependent in great part on its ability each year to redesign, restyle and extend
existing core products and product lines, to design and develop innovative new
products and product lines and to expand its marketing capability.
15
Mattel 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. Mattel's portfolio of
brands can be grouped into the following categories:
Girls - including Barbie(R) fashion rolls and accessories, collector dolls,
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)
Wheels - 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), and Myst(R)
Mattel's business is seasonal, and, therefore, results of operations are
comparable only with corresponding periods.
Results of Operations - Third Quarter
Consolidated Results
Net income for the third quarter of 1999 was $135.3 million or $0.32 per diluted
share as compared to net income of $168.7 million or $0.39 per diluted share in
the third quarter of 1998. Profitability in the third quarter of 1999 was
negatively impacted by Learning Company distributor and retailer returns and
allowances of approximately $58 million; increased bad debt reserves of
approximately $56 million, including $35 million related to one of Learning
Company's major distributors; and Mattel's decision not to complete a
significant Learning Company e-commerce and licensing transaction which was
expected to generate approximately $60 million in pre-tax earnings. Third
quarter 1998 results of operations were negatively impacted by non-recurring
charges, including restructuring and other charges of $59.1 million related to
1998 acquisitions and a $38.0 million charge for the voluntary recall of Power
Wheels(R) battery-powered ride-on vehicles. Total non-recurring charges of
approximately $65 million, net of taxes, impacted the 1998 third quarter
earnings by $0.15 per share.
For the Three Months Ended
------------------------------------------
Sept. 30, Sept. 30,
1999 1998
- ------------------------------------------------------------------------------------------
Net sales 100% 100%
==========================================================================================
Gross profit 47.5% 52.8%
Advertising and promotion expenses 16.2 14.9
Other selling and administrative expenses 18.2 14.8
Amortization of intangibles 1.2 1.1
Restructuring and other charges - 5.1
Other (income) expense, net - 0.5
- ------------------------------------------------------------------------------------------
Operating profit 11.9 16.4
Interest expense 2.2 2.2
- ------------------------------------------------------------------------------------------
Income before income taxes 9.7% 14.2%
==========================================================================================
16
Net sales in the third quarter of 1999 decreased 3% to $1,825.2 million, from
$1,884.8 million in 1998. Sales to customers within the US decreased 2% and
accounted for 71% and 70% of consolidated sales in the 1999 and 1998 third
quarters, respectively. Sales to customers outside the US decreased 7% from the
year ago quarter, largely impacted by lower sales in Europe. Mattel is currently
working on an extensive market-specific strategy with the goal of improving
sales of its core product lines in the International markets.
Sales in the Girls category decreased 9% as a result of a decline in Barbie(R)
sales, partially offset by an increase in sales of American Girl(R) products.
Sales in the Infant and Preschool category declined 1%, mainly due to a decrease
in Power Wheels(R) sales. This decrease was largely offset by increased sales of
core Fisher-Price(R) products and Sesame Street(R) products. Sales of Wheels
products increased 12%, demonstrating continued strength across Hot Wheels(R),
Matchbox(R), and Tyco(R) Radio Control. Sales of Entertainment products,
including Disney and Nickelodeon(R), decreased 4% due to fewer properties
introduced this year versus the same quarter last year. Sales of Learning
Company consumer software products decreased 8%, mainly due to higher than
expected product returns resulting from a weakness in the CD-ROM market and
disruption of Learning Company's distribution channels associated with Mattel's
merger with Learning Company. This decrease was partially offset by an increase
in licensing revenues. Licensing revenues grew from approximately $11 million in
the third quarter of 1998 to $25 million in the third quarter of 1999, largely
generated from a licensing agreement with Genealogy.com.
Gross profit, as a percentage of net sales, was 47.5% in the third quarter of
1999, down from 52.8% in the third quarter of 1998 largely due to lower profit
margin at Learning Company as a result of distributor and retailer returns and
allowances, overall change in product mix, and slightly higher product costs due
to strengthening currencies in countries where Mattel manufactures its products.
As a percentage of net sales, advertising and promotion expenses increased from
14.9% in the third quarter of 1998 to 16.2% in the third quarter of 1999 mainly
as a result of higher rebates offered to consumers on Learning Company products.
Other selling and administrative expenses increased to 18.2% of net sales in the
third quarter of 1999 from 14.8% in the third quarter of 1998 primarily due to
increased Learning Company bad debt expense.
Business Segment Results
Mattel'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 marketing segment is further divided into USA
Toys, US Fisher-Price/Tyco Preschool and Other. USA Toys principally sells
products in the Girls, Entertainment and Wheels categories, while US 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 marketing 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.
17
The USA Toys segment sales decreased $20.0 million as a result of lower sales of
Entertainment products, partially offset by increased sales of Wheels products.
The US Fisher-Price/Tyco Preschool segment sales grew by $8.8 million, largely
due to higher sales of core Fisher-Price(R) products, partially offset by lower
sales of Power Wheels(R) products. Sales in the Other segment decreased $2.3
million. The International segment sales decreased $39.7 million due to lower
sales of Barbie(R) and Infant and Preschool products, partially offset by
increased sales of Wheels products. The Learning Company segment sales decreased
$17.8 million mainly due to higher than expected product returns resulting from
a weakness in the CD-ROM market and disruption of Learning Company's
distribution channels associated with Mattel's merger with Learning Company.
This decrease was partially offset by an increase in licensing revenues.
Licensing revenues grew from approximately $11 million in the third quarter of
1998 to $25 million in the third quarter of 1999, largely generated from a
licensing agreement with Genealogy.com.
The USA Toys segment operating profit declined $24.4 million to $160.9 million
and the International segment operating profit decreased $22.3 million to $83.2
million, largely due to lower sales volume as well as an unfavorable shift in
product mix and slightly higher product costs due to strengthening currencies.
The US Fisher-Price/Tyco Preschool segment operating profit decreased $1.8
million to $44.6 million. The Other segment incurred an operating loss of $10.3
million in the third quarter of 1999 compared to a $7.3 million loss in the
third quarter of 1998. The Learning Company segment realized a loss of $132.5
million in the third quarter of 1999 compared to a profit of $54.5 million in
the third quarter of 1998. A slowdown in the growth rate of sales in the CD-ROM
industry, increased competitive pressures, and disruption of Learning Company's
distribution channels associated with Mattel's merger with Learning Company,
caused Learning Company revenue to fall substantially below Mattel's projections
for the third quarter of 1999 as well as the comparable quarter of 1998. In
addition, anticipated revenue related to a significant e-commerce and licensing
transaction was not realized because Mattel determined that the terms of the
transaction would not be in the best interests of Mattel and its stockholders.
Mattel views e-commerce and licensing transactions to be a significant source of
potential revenues for Mattel, including its Learning Company division, and
intends to continue to seek to consummate such transactions.
Learning Company revenue and operating expenses for the third quarter of 1999
also were impacted by significant adjustments resulting from the following
changes in accounting estimates:
(In millions)
- ----------------------------------------------------------------------------------------
Increased provision for returns and other customer deductions $ 58
Increased provision for doubtful accounts and other account
receivable writeoffs 56
Other 18
- ----------------------------------------------------------------------------------------
Total $132
========================================================================================
18
During the third quarter of 1999, Mattel reevaluated the required allowance for
returns in light of higher than normal returns and other deductions taken by
distributors and certain major retail customers of Learning Company. Mattel
believes it was necessary to increase the allowance primarily because of a
slowdown in the CD-ROM industry sell-through identified in the third quarter of
1999, and because Mattel reassessed its plans for the use of distributors in the
United States. The increased provision for doubtful accounts includes $35
million related to the worsening financial condition of one of Learning
Company's largest distributors. Mattel expects that Learning Company will not
return to substantial profitability in the fourth quarter primarily due to an
industry-wide slowdown in CD-ROM sales and because Mattel has reassessed its
plans for the use of distributors in the United States.
Results of Operations - Nine Months
Consolidated Results
Net loss for the first nine months of 1999 was $64.0 million or $0.17 per
diluted share as compared to a net income of $117.4 million or $0.27 per diluted
share in the first nine months of 1998. Profitability in the first nine months
of 1999 was negatively impacted by restructuring and other charges totaling
$348.9 million related to the Mattel restructuring plan, the merger and
integration of Learning Company, and other non-recurring charges. Additionally,
the first nine months results were negatively impacted by third quarter Learning
Company distributor and retailer returns and allowances of approximately $58
million; increased bad debt reserves of approximately $56 million, including $35
million related to one of Learning Company's major distributors; and Mattel's
decision not to complete a significant Learning Company licensing agreement
which was expected to generate approximately $60 million in pre-tax earnings.
Results of operations for the first nine months of 1998 were negatively impacted
by a $56.8 million in-process technology writeoff related to the acquisition of
Mindscape, Inc. in March 1998, restructuring and other charges of $95.2 million
related to 1998 acquisitions, and a $38.0 million charge related to the
voluntary recall of Power Wheels(R) battery-powered ride-on vehicles. Total
non-recurring charges of approximately $270 million, net of taxes, impacted the
1999 nine month earnings by $0.66 per share. Total non-recurring charges of
approximately $147 million, net of taxes, impacted the 1998 nine month earnings
by $0.35 per share.
For the Nine Months Ended
------------------------------------------
Sept. 30, Sept. 30,
1999 1998
- ------------------------------------------------------------------------------------------
Net sales 100% 100%
==========================================================================================
Gross profit 48.5% 51.2%
Advertising and promotion expenses 14.7 14.1
Other selling and administrative expenses 22.3 20.6
Amortization of intangibles 1.7 2.7
Charge for incomplete technology - 1.5
Restructuring and other charges 9.3 3.5
Other income, net (0.2) -
- ------------------------------------------------------------------------------------------
Operating profit 0.7 8.8
Interest expense 2.7 2.2
- ------------------------------------------------------------------------------------------
(Loss) income before income taxes (2.0)% 6.6%
==========================================================================================
19
Net sales in the first nine months of 1999 decreased 2% to $3,744.4 million,
from $3,802.9 million in 1998. Sales to customers within the US remained
unchanged and accounted for 72% and 71% of consolidated sales in the 1999 and
1998 nine months, respectively. Sales to customers outside the US decreased 6%
in the first nine months of 1999 compared to the same period in 1998 largely
impacted by lower sales in Europe.
Sales in the Girls category decreased 1% largely due to a decline in Barbie(R)
sales, partially offset by incremental sales of American Girl(R) products
resulting from the Pleasant Company acquisition. Pleasant Company was acquired
in July 1998 and therefore the results of operations for the first nine months
of 1998 only reflect three months of results. Sales in the Infant and Preschool
category declined 10% largely due to last year's success of `Tickle Me Elmo' and
decreased Power Wheels(R) sales, partially offset by an increase in US sales of
core Fisher-Price(R) products. Sales of Wheels products increased 13%,
demonstrating continued strength across Hot Wheels(R), Matchbox(R), and Tyco(R)
Radio Control. Sales of Entertainment products, including Disney and
Nickelodeon(R), decreased 4%. Sales of Learning Company consumer software
products increased 7%, mainly due to the acquisition of Mindscape, Inc., higher
licensing revenues, and sales of new product lines. This was partially offset by
increased distributor and retailer claims for returns and allowances due to a
weakness in the CD-ROM market and disruption of Learning Company's distribution
channels associated with Mattel's merger with Learning Company. The increase in
licensing revenues of approximately $46 million was largely generated from
licensing agreements, including Genealogy.com in the third quarter of 1999 and
GoodHome in the second quarter of 1999. Mattel views e-commerce and licensing
transactions to be a significant source of potential revenue for its Learning
Company division and intends to continue to seek to consummate such
transactions.
Gross profit, as a percentage of net sales, was 48.5% in the first nine months
of 1999 compared to 51.2% in the first nine months of 1998 largely due to lower
profit margin at Learning Company as a result of distributor and retailer
returns and allowances and overall change in product mix. As a percentage of net
sales, advertising and promotion expenses increased from 14.1% in 1998 to 14.7%
in 1999 mainly as a result of higher rebates offered to consumers on Learning
Company products. Other selling and administrative expenses increased to 22.3%
in 1999 from 20.6% in 1998 primarily due to increased Learning Company bad debt
expense. Amortization of intangibles decreased by $38.2 million, mainly as a
result of completed amortization of intangibles related to certain Learning
Company acquisitions, partially offset by amortization of intangibles resulting
from the 1998 acquisitions. Interest expense increased $18.9 million, primarily
due to increased short- and long-term borrowings to finance Mattel's 1998
acquisitions.
Business Segment Results
The USA Toys segment sales decreased by $80.4 million compared to last year,
mainly due to decreases in Disney Infant and Preschool products and
Entertainment products. This decrease was partially offset by increased sales of
Barbie(R) and Wheels products. The US Fisher-Price/Tyco Preschool sales
decreased $36.1 million, primarily due
20
to lower Tyco Preschool sales in the first half of 1999 as a result of last
year's success of Sesame Street(R) products, including `Tickle Me Elmo'. This
was partially offset by an increase in sales of core Fisher-Price products.
Sales in the Other segment increased $71.4 million due to incremental sales
resulting from the July 1998 acquisition of the Pleasant Company. The
International segment sales decreased $65.8 million mainly due to lower sales of
Barbie(R) and Infant and Preschool products, partially offset by sales increases
in Wheels and Entertainment products. The Learning Company segment sales
increased $41.3 million mainly due to the acquisition of Mindscape Inc., higher
licensing revenues, and sales of new product lines. This was partially offset by
increased distributor and retailer claims for returns and allowances due to a
weakness in the CD-ROM market and disruption of Learning Company's distribution
channels associated with Mattel's merger with Learning Company. The increase in
licensing revenues of approximately $46 million was largely generated from
licensing agreements, including Genealogy.com in the third quarter of 1999 and
GoodHome in the second quarter of 1999.
The USA Toys segment operating profit declined $65.2 million to $216.5 million
and the International segment operating profit decreased $42.1 million to $67.9
million. The US Fisher-Price/Tyco Preschool segment operating profit decreased
$16.2 million to $56.1 million. The decline in operating profit in each of these
segments is largely attributable to lower sales volume as well as an unfavorable
shift in product mix. The Other segment incurred an operating loss of $34.6
million in the first nine months of 1999 compared to a $9.5 million loss in the
first nine months of 1998, largely due to incremental amortization and overhead
expenses resulting from the July 1998 acquisition of the Pleasant Company. The
Learning Company segment realized a loss of $22.3 million in the first nine
months of 1999 compared to a profit of $40.9 million in the first
nine months of 1998. This profit decline was principally the result of
distributor and retailer returns and allowances and increased bad debt reserves,
partially offset by increased licensing revenues and lower amortization
resulting from complete amortization of intangibles related to certain Learning
Company acquisitions.
Financial Position
Mattel's cash position as of September 30, 1999 was $92.7 million compared to
$377.4 million as of September 30, 1998. The $284.7 million decline was
principally due to the repayment of Learning Company credit lines, the
termination of Learning Company's receivable factoring facilities, and the
payment of restructuring and integration charges related to the Learning Company
merger. Cash decreased by $376.5 million since December 31, 1998 primarily due
to the financing of seasonal working capital requirements, the repayment of
Learning Company credit lines, the termination of Learning Company's receivable
factoring facilities, and the payment of restructuring and integration charges
related to the Learning Company merger. Accounts receivable, net increased by
$101.9 million from the third quarter of 1998, primarily due to the cancellation
of Learning Company's receivables factoring facility. Accounts receivable, net
increased $850.8 million from year end mainly due to Mattel's normal seasonal
dating terms with its customers. Inventory balances decreased $65.9 million from
September 30, 1998, primarily due to lower finished goods inventories resulting
from Mattel's shift to just-in-time production and shipping programs, partially
offset by higher Learning Company inventory. Prepaid expenses and other current
assets increased $94.1
21
million compared to the third quarter of 1998, and $99.4 million compared to
year end 1998 as a result of higher prepaid royalties and software development
costs. Property, plant and equipment, net decreased $35.2 million from year end
mainly due to asset writedowns related to the 1999 restructuring. Intangibles
decreased $90.3 million compared to the 1998 third quarter end, mainly due to
amortization.
Short-term borrowings increased $28.2 million compared to the 1998 third quarter
end and increased $746.4 million compared to the 1998 year end mainly due to the
financing of seasonal working capital requirements. Current portion of long-term
liabilities increased $119.5 million over the 1998 third quarter end, primarily
due to the reclassification of $100.0 million of 6-3/4% senior notes and $30.0
million of medium-term notes from long-term to current portion. Current portion
of long-term liabilities increased $99.6 million compared to the 1998 year end
primarily due to the reclassification of $100.0 million of 6-3/4% senior notes
from long-term to current portion. 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 Mattel's various
short-term bank lines of credit.
A summary of Mattel's capitalization is as follows:
(In millions) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998
- ------------------------------------------------------------------------------------------
Medium-term notes $ 540.5 17% $ 520.5 15% $ 540.5 16%
Senior notes 501.0 15 591.0 17 601.0 17
Other long-term debt obligations 42.9 1 43.1 1 43.0 1
- ------------------------------------------------------------------------------------------
Total long-term debt 1,084.4 33 1,154.6 33 1,184.5 34
Other long-term liabilities 159.5 5 143.4 4 149.1 4
Stockholders' equity 2,005.2 62 2,223.8 63 2,170.8 62
- ------------------------------------------------------------------------------------------
$3,249.1 100% $3,521.8 100% $3,504.4 100%
==========================================================================================
Total long-term debt as a percentage of total capitalization remained flat at
33% compared to the 1998 third quarter end. Medium-term notes increased by $20.0
million compared to the 1998 third quarter end due to issuance of $50.0 million
in notes, partially offset by the reclassification of $30.0 million to current
portion of long-term liabilities. Senior notes decreased $90.0 million compared
to the 1998 third quarter end and $100.0 million compared to the 1998 year end,
primarily due to the reclassification of $100.0 million of 6-3/4% senior notes
to current portion of long-term liabilities. Mattel 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 decreased
$218.6 million since September 30, 1998 primarily due to treasury stock
purchases, dividend declarations on common and preferred stock and the
unfavorable effect of currency translation adjustments, partially offset by
cumulative earnings and cash received from exercise of employee stock options.
Stockholders' equity declined $165.6 million from year end 1998 mainly due to
dividend declarations on common and preferred stock, Mattel's net loss position
due to restructuring and other non-recurring charges, treasury stock purchases
and unfavorable effect of currency translation adjustments, partially offset by
cash received from exercise of employee stock options.
22
Business Combination
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 each company,
after which Learning Company was merged with and into Mattel, with Mattel being
the surviving corporation. Each share of Learning Company Series A Preferred
Stock was converted into 20 shares of Learning Company common stock immediately
prior to the consummation of the merger. Pursuant to the merger agreement, each
outstanding share of Learning Company common stock was converted into 1.2 shares
of Mattel common stock upon consummation of the merger. As a result,
approximately 126 million Mattel common shares were issued in exchange for all
shares of Learning Company common stock outstanding as of the merger date. The
outstanding share of Learning Company special voting stock was converted into
one share of Mattel Special Voting Preferred Stock. Each outstanding
exchangeable share of Learning Company's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but upon consummation of the merger became
exchangeable for 1.2 shares of Mattel common stock.
Restructuring and Other Charges
During the second quarter of 1999, Mattel completed its merger with Learning
Company and finalized a previously announced plan of restructuring and
integration. These actions, along with other one-time events, resulted in a
non-recurring pre-tax charge against operations of $345.0 million, $267.0
million after tax or $0.65 per share. Of the total pre-tax charge,
approximately $141 million is expected to be spent in 1999 and $105 million in
2000 in connection with the restructuring and integration. Total cash outlay of
approximately $276 million will be funded from existing cash balances and
internally generated cash flows from operations.
The restructuring and integration plan, expected to be substantially complete by
June 2000, provides for the consolidation and realignment of Mattel's
operations. The plan is aimed at leveraging global resources in areas of
manufacturing, marketing and distribution, eliminating duplicative functions
worldwide and achieving improved operating efficiencies. The plan is designed
to reduce product costs and overhead spending which is expected to result in
cost savings of approximately $50 million in 1999 and at least $400 million over
the following three years. These savings are net of anticipated incremental
integration related spending of approximately $14 million. This incremental
spending includes approximately $4 million for capital investment at existing
manufacturing facilities as well as network consolidation, and charges for the
relocation of employees and movement of equipment, employee transition/training,
and manufacturing start-up costs.
23
The following are the major restructuring and integration initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of four higher cost manufacturing facilities.
Components of the restructuring and other non-recurring charges recorded in the
second quarter of 1999 and amounts incurred through September 30, 1999 are as
follows:
Total Charge Balance
June 30, Amount Sept. 30,
(In millions) 1999 Incurred 1999
- ---------------------------------------------------------------------------------------------------------------
Severance and other compensation $108 $ 23 $ 85
Distributor, license and other contract terminations 57 39 18
Writedown of assets 42 42 -
Lease termination costs 22 - 22
- ---------------------------------------------------------------------------------------------------------------
Total restructuring costs and asset writedowns 229 104 125
Merger-related transaction and other costs 86 73 13
Other non-recurring charges 30 12 18
- ---------------------------------------------------------------------------------------------------------------
Total restructuring, asset writedowns and other
charges $345 $189 $156
===============================================================================================================
Severance and other compensation costs relate to the termination of
approximately 4,100 employees around the world. Approximately 3,200 of these
employees are hourly workers located in certain of Mattel's manufacturing
facilities, of which approximately 2,200 were employed in the manufacturing
facility in Kuala Lumpur, which ceased operations in September 1999. The
remainder of the work force reductions consists of downsizing sales and
marketing groups in the US, Europe and Asia-Pacific regions as well as the
elimination of duplicate administrative personnel following the consolidation of
back-office functions, the majority of which are in Europe. As of September 30,
1999, approximately $23 million had been paid to nearly 2,500 terminated
employees. Cash severance payments will extend beyond the completion of the
workforce reductions due to the severance payment options available to affected
employees.
Mattel terminated its sponsorship agreements related to certain attractions for
a total cost of $37.5 million, inclusive of the writeoff of related capitalized
costs. The cash portion of this charge was paid as of July 1999. Mattel also
recognized a $19.5 million charge, mainly related to settlements for termination
of certain foreign distributor agreements in conjunction with the realignment of
its sales and distribution network.
Mattel's restructuring plan resulted in the impairment of certain long-lived
assets related to the operations being closed. The sum of the undiscounted
future cash flows of these assets was not sufficient to cover the carrying
amount of these assets. As a result, these long-lived assets were written down
to fair market value and will be depreciated over their remaining useful lives.
Fair value of the impaired assets was determined by either third-party
24
appraisals or past experience in disposing of similar assets. Buildings and, to
the extent possible, equipment will be sold while the remainder of the impaired
assets will be abandoned when taken out of service. Nearly all of the revenue-
generating activities related to these assets will continue as a result of more
effective utilization of other assets. A significant portion of the fixed asset
writedowns is concentrated in the Operations and Learning Company segments. Two
of the four manufacturing facilities ceased production during the third quarter
of 1999. In addition, other asset writeoffs include approximately $10 million of
goodwill related to a recently acquired software business, which was closed
following the merger with Learning Company.
Lease termination costs include penalties imposed upon canceling existing leases
and future obligations under long-term rental agreements at facilities being
vacated following the merger and realignment.
Merger-related transaction costs consist of investment banking fees, legal,
accounting and printing costs, registration fees and other costs recognized in
connection with the merger. Also included in this amount are the contractual
change of control payments arising from the merger. The majority of all merger-
related transaction costs were paid during the second quarter of 1999.
Other non-recurring charges include an additional $16.0 million related to the
October 1998 recall of Mattel's Power Wheel(R) vehicles and $14.0 million for
environmental remediation costs related to a manufacturing facility on a leased
property in Beaverton, Oregon, based on the completion and approval of the
remediation plan and feasibility study.
Foreign Currency Risk
Mattel's results of operations and cash flows can be impacted by exchange rate
fluctuations. To limit the exposure associated with exchange rate movements,
Mattel enters into foreign currency forward exchange contracts primarily to
hedge its purchase of inventory, sales and other intercompany transactions
denominated in foreign currencies. Mattel's results of operations can also be
affected by the translation of foreign revenues and earnings into US dollars.
Market risk exposures exist with respect to the settlement of foreign currency
transactions during the year because currency fluctuations cannot be predicted
with certainty. Mattel seeks to mitigate its exposure to market risk by
monitoring its currency exchange exposure for the year and partially or fully
hedging such exposure. In addition, Mattel manages its exposure through the
selection of currencies used for foreign borrowings and intercompany invoicing.
Mattel does not trade in financial instruments for speculative purposes.
25
Year 2000 Update
Many currently installed computer systems and software products, including
several used by Mattel, were originally 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 were 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 could incorrectly recognize a
date that uses only "00", as the year 1900, rather than the year 2000. This
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 to assess, remediate and test Mattel's internal systems,
hardware and processes, including key operational, manufacturing and financial
systems. Learning Company, acquired by Mattel in May 1999, followed its own
year 2000 readiness plan prior to the merger. Since the date of merger, Mattel
has evaluated Learning Company's year 2000 readiness. Learning Company's status
of preparation and progress are now essentially the same as Mattel's.
Mattel's management and board of directors are 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
readiness 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 has adhered to a multi-step process comprised of 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 code and system modifications (phase
3). Mattel completed the awareness, inventory and code change phases of the
plan as scheduled. Critical system verification and testing (phase 4) was
completed prior to September 30, 1999.
26
Contingency planning is being done on a worldwide basis by all business units.
Each business unit is concentrating on factors external to Mattel which may
adversely impact its ability to conduct operations. Specifically, for those
locations where a high likelihood of a material failure exists, Mattel has
established revised procedures for managing operations, including identification
of alternate suppliers and vendors whose systems are year 2000 compliant.
Mattel's contingency plans (phase 5) have two key parts. The first part, which
was completed in mid-year 1999, was to assess possible risks of business
interruption that could affect various areas within Mattel. The second part,
expected to be completed early in the fourth quarter, is to develop a business
resumption plan in each location.
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. Mattel has received responses from the majority of its
suppliers and customers. These responses have been positive and support the
overall initiatives toward achieving year 2000 compliance. Mattel continues to
follow-up with those other customers and suppliers failing to reply to the
initial inquiry. However, such customers and suppliers do not represent a
significant part of Mattel's operations.
All Mattel software products currently available for sale to consumers and under
development are year 2000 compliant. Mattel software products manufactured by
third-parties under licensing agreements have been certified as year 2000
compliant by such manufacturers. Mattel sells software products primarily for
use in homes and schools, and has sold products over the last few years that
have since been discontinued but may still be used by consumers. Several
discontinued products sold by Learning Company in the past may not operate as
intended on certain computers due to the year 2000 issue.
As of September 30, 1999, Mattel has spent a total of approximately $13 million
in connection with addressing the year 2000 issue. Any additional charges are
expected to be minimal. These costs are largely due to the use of internal
resources dedicated to achieving year 2000 compliance, and 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 Mattel's consolidated
financial position or results of operation. All costs of addressing the year
2000 issue have been and will continue to be funded from internally generated
cash.
Mattel has dedicated resources to remediate, test and otherwise prepare all
aspects of its internal systems. Steps were taken to verify that all key third-
party suppliers and customers were taking measures to ensure their own readiness
and timely implementation. However, if all year 2000 issues have not been
properly identified and assessed there can be no assurance that the year 2000
issue will not materially adversely affect Mattel's results of operations,
liquidity and financial position or adversely affect Mattel's relationships with
customers, vendors or others. For example, failure to achieve year 2000
readiness for Mattel's internal systems could delay its ability to manufacture
and ship products or disrupt customer service and technical support facilities.
Mattel also relies on third parties such as manufacturing suppliers and vendors
and large retail customers. If these or other third parties
27
experience year 2000 failures or malfunctions there could be a material adverse
affect on Mattel's ability to conduct ongoing operations. Additionally, Mattel
could incur increased costs, lost sales or other negative consequences,
including potential litigation, as a result of customer dissatisfaction with
products that are not year 2000 compliant.
The above discussion regarding costs, risks and estimated completion dates for
the year 2000 issue is based on Mattel's best estimates given information that
was available on September 30, 1999, and is subject to change. Actual results
could differ from these estimates.
28
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Following Mattel's announcement on October 4, 1999, that it expected an earnings
shortfall at its Learning Company division in the third quarter of 1999, several
of Mattel's stockholders filed purported class action complaints in the United
States District Courts for the Central District of California, the Southern
District of New York, and the District of Massachusetts, naming Mattel and
certain of its officers and directors as defendants. The complaints generally
allege, among other things, that defendants made false or misleading statements
that artificially inflated the price of Mattel common stock by overstating the
revenues and net income of Mattel and Learning Company and by falsely
representing that the Learning Company merger would be immediately accretive to
Mattel's 1999 and 2000 financial results.
In addition, a Mattel stockholder filed a derivative complaint on behalf and for
the benefit of Mattel in the Superior Court of the State of California, County
of Los Angeles. The complaint alleges that Mattel's directors breached their
fiduciary duties, wasted corporate assets and grossly mismanaged Mattel in
connection with Mattel's merger with Learning Company and seeks both monetary
and injunctive relief.
Mattel believes the lawsuits are without merit and intends to defend them
vigorously.
Item 2. Changes in Securities and Use of Proceeds
(c) On June 16 1999, Mattel issued a notice to holders of its Series C
Mandatorily Convertible Redeemable Preferred Stock and to the holders of
the related Depository Shares informing them of Mattel's optional
redemption of these securities on July 1, 1999. On July 1, 1999, each
share of Series C Preferred Stock was redeemed in exchange for 10.015914
shares of Mattel common stock, and each Depository Share was redeemed in
exchange for 0.400637 shares of Mattel common stock. A total of 7,731,483
shares of Mattel common stock were issued as a result of the redemption.
Such shares were issued under Section 3(a)(9) of the Securities Act of
1933, as amended.
29
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
11.0 Computation of Income (Loss) per Common and Common
Equivalent Share
27.0 Financial Data Schedule (EDGAR filing only)
99.0 Severance Agreement dated April 5, 1999 between Mattel and
Bruce L. Stein
(b) Reports on Form 8-K
-------------------
Mattel filed the following Current Report on Form 8-K during the
quarterly period ended September 30, 1999:
Date of Report Items Reported Financial Statements Filed
------------------------------------------------------------------
July 22, 1999 5,7 None
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTEL, INC.
---------------------------------------
(Registrant)
Date: As of November 11, 1999 By: /s/ Kevin M. Farr
----------------------- ---------------------------------------
Kevin M. Farr
Senior Vice President and
Corporate Controller
(Chief Accounting Officer and Duly
Authorized Officer of the Registrant)
31