SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: July 30, 1997
MATTEL, INC.
------------
(Exact name of registrant as specified in its charter)
Delaware 001-05647 95-1567322
- ------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File No.) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 252-2000
----------------------------
N/A
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Information to be included in the Report
----------------------------------------
Item 5. Other Events
- ------- ------------
In conformity with the requirements of Regulation S-X, Rule
3.05 (b)(2), attached hereto are the restated, combined
balance sheets of Mattel, Inc. and Subsidiaries as of
December 31, 1996 and 1995 and the statements of income,
cash flows and shareholders' equity for the years ended
December 31, 1996, 1995 and 1994 and the related notes
thereto. Such financial statements reflect the March 27,
1997 merger of Tyco Toys, Inc. with and into Mattel, Inc.,
accounted for as a pooling of interests.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders of Mattel, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of income, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Mattel, Inc.
and its subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the
financial statements of Tyco Toys, Inc. and its subsidiaries, which
statements reflect total assets of $646,339,000 and $615,132,000 at
December 31, 1996 and 1995, respectively, and net sales of $720,954,000,
$709,109,000 and $753,098,000 for each of the three years in the period
ended December 31, 1996. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for Tyco Toys, Inc.
and its subsidiaries, is based solely on the report of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- ------------------------
Los Angeles, California
February 5, 1997 (July 18, 1997 with respect to the merger with Tyco Toys,
Inc. and other subsequent events described in Note 11)
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
Tyco Toys, Inc.
Mount Laurel, New Jersey
We have audited the accompanying consolidated balance sheets of Tyco Toys,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996, not
separately presented herein. These financial statements, which were included
in Mattel, Inc.'s Form 8-K filed on April 17, 1997, are the responsibility of
the Company's management. Our responsibility is to express an opinion on
those financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tyco Toys, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Philadelphia, Pennsylvania
February 4, 1997 except for note 15, as to which the date is March 27, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
---------------------------
Mattel, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31, December 31,
(In thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 550,271 $ 493,686
Marketable securities - 17,375
Accounts receivable, less allowances of
$21.0 million at December 31, 1996 and
$16.8 million at December 31, 1995 948,940 886,344
Inventories 444,178 407,551
Prepaid expenses and other current assets 195,673 209,984
---------- ----------
Total current assets 2,139,062 2,014,940
---------- ----------
Property, Plant and Equipment
Land 30,864 25,724
Buildings 216,523 196,919
Machinery and equipment 438,969 383,169
Capitalized leases 26,512 26,872
Leasehold improvements 69,732 61,001
---------- ----------
782,600 693,685
Less: accumulated depreciation 323,096 292,738
---------- ----------
459,504 400,947
Tools, dies and molds, net 156,777 131,388
---------- ----------
Property, plant and equipment, net 616,281 532,335
---------- ----------
Other Noncurrent Assets
Intangible assets, net 611,410 634,451
Sundry assets 214,389 159,644
---------- ----------
$3,581,142 $3,341,370
========== ==========
<FN>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods have been restated retroactively for the
effects of the March 1997 merger with Tyco Toys, Inc. ("Tyco"), accounted for
as a pooling of interests. See Note 11.
<PAGE>
<CAPTION>
December 31, December 31,
(In thousands, except share data) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 28,924 $ 76,443
Current portion of long-term liabilities 106,596 33,694
Accounts payable 312,378 295,958
Accrued liabilities 510,691 504,175
Income taxes payable 183,288 157,681
---------- ----------
Total current liabilities 1,141,877 1,067,951
---------- ----------
Long-Term Liabilities
6-7/8% Senior Notes - 99,752
6-3/4% Senior Notes 100,000 100,000
10-1/8% Senior Subordinated Notes 126,500 126,500
Medium-Term Notes 220,000 220,000
Mortgage notes 47,600 48,250
Other 139,242 127,237
---------- ----------
Total long-term liabilities 633,342 721,739
---------- ----------
Shareholders' Equity
Preferred stock, Series B $1.00 par value,
$1,050.00 liquidation preference per share,
53.6 thousand shares authorized, issued
and outstanding 54 52
Preferred stock, Series C $1.00 par value,
$125.00 liquidation preference per share,
772.8 thousand shares authorized, issued
and outstanding 773 -
Common stock $1.00 par value, 600.0 million and
300.0 million shares authorized in 1996 and
1995, respectively; 296.1 million shares
issued (a) 296,091 296,080
Additional paid-in capital 518,296 432,150
Treasury stock at cost; 8.1 million and
3.6 million shares in 1996 and 1995,
respectively (a) (215,999) (75,574)
Retained earnings (b) 1,293,653 994,645
Currency translation and other adjustments (b) (86,945) (95,673)
---------- ----------
Total shareholders' equity 1,805,923 1,551,680
---------- ----------
$3,581,142 $3,341,370
========== ==========
<FN>
Commitments and Contingencies (See accompanying notes.)
(a) Share data for 1995 has been restated for the effects of the
five-for-four stock split distributed in March 1996.
(b) Since December 26, 1987 (Note 1).
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Mattel, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Year
----------------------------------
(In thousands, except per share amounts) 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $4,535,332 $4,369,816 $3,971,226
Cost of sales 2,315,574 2,302,076 2,090,166
---------- ---------- ----------
Gross Profit 2,219,758 2,067,740 1,881,060
Advertising and promotion expenses 778,919 731,746 662,450
Other selling and administrative expenses 772,335 721,362 658,416
Restructuring and integration charges - 8,900 76,700
Interest expense 100,226 102,983 87,071
Other expense (income), net 31,522 (1,919) 34,266
---------- ---------- ----------
Income Before Income Taxes 536,756 504,668 362,157
Provision for income taxes 164,532 166,779 137,487
---------- ---------- ----------
Net Income 372,224 337,889 224,670
Preferred and preference stock
dividend requirements 7,391 6,542 6,846
---------- ---------- ----------
Net Income Applicable to Common Shares $ 364,833 $ 331,347 $ 217,824
========== ========== ==========
Income Per Common and Common
Equivalent Share
Net income $ 1.24 $ 1.11 $ 0.73
========== ========== ==========
Average number of common and common
equivalent shares 295,407 298,019 296,877
========== ========== ==========
Dividends Declared Per Common Share $ 0.24 $ 0.19 $ 0.15
========== ========== ==========
<FN>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 11.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Mattel, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Year
---------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 372,224 $ 337,889 $ 224,670
Adjustments to reconcile net income to
net cash flows from operating activities:
Gain on sale of business - (9,142) -
Depreciation 144,672 133,029 130,253
Amortization 36,671 36,976 26,075
Increase (decrease) from changes in assets
and liabilities:
Accounts receivable (71,348) 94,540 (136,249)
Inventories (38,304) (5,204) (40,015)
Prepaid expenses and other current assets 15,310 10,090 (35,537)
Accounts payable, accrued liabilities and
income taxes payable 58,072 (144,995) 180,299
Deferred compensation and other retirement
plans 9,110 12,437 13,533
Deferred income taxes (2,147) (17,235) 3,165
Other, net 551 (1,786) (1,040)
--------- --------- ---------
Net cash flows from operating activities 524,811 446,599 365,154
--------- --------- ---------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (108,641) (103,257) (90,977)
Purchases of other property, plant and equipment (122,498) (119,587) (93,563)
Purchases of marketable securities (8,000) (29,154) (29,032)
Purchase of other long-term investments (25,114) - -
Proceeds from sales of other property,
plant and equipment 6,250 11,908 13,654
Proceeds from sales of marketable securities 25,315 32,237 25,637
Proceeds from sale of business - 21,129 -
Contingent consideration and investments in
acquired businesses (8,625) (8,625) (374,965)
Other, net 317 (826) (944)
--------- --------- ---------
Net cash flows used for investing activities (240,996) (196,175) (550,190)
--------- --------- ---------
Cash Flows From Financing Activities:
Short-term borrowings, net (45,652) 2,558 (19,999)
Issuance of Medium-Term Notes - 139,500 110,500
Payment of Medium-Term Notes (30,000) - -
Long-term foreign borrowings (3,717) (2,572) (4,337)
Redemption of Fisher-Price term loan - - (120,629)
Payment of other long-term debt - - (26,458)
Tax benefit of employee stock options exercised 26,300 8,500 23,923
Exercise of stock options and warrants 73,314 24,601 39,417
Purchase of treasury stock (269,771) (64,284) (80,885)
Repurchase of Series F Preference Stock - (73,866) -
Proceeds from issuance of preferred stock 92,702 - 47,000
Dividends paid on common, preferred and
preference stock (66,473) (50,963) (47,840)
Payment for tendered Fisher-Price warrants - - (4,891)
Payment of debt issuance costs (832) (6,582) (329)
Other, net (2,295) (1,041) 4,670
--------- --------- ---------
Net cash flows used for financing activities (226,424) (24,149) (79,858)
Effect of Exchange Rate Changes on Cash (806) (2,165) (3,679)
--------- --------- ---------
Increase (Decrease) in Cash 56,585 224,110 (268,573)
Cash at Beginning of Year 493,686 269,576 538,149
--------- --------- ---------
Cash at End of Year $ 550,271 $ 493,686 $ 269,576
========= ========= =========
<FN>
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 March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 11.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
Mattel, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Additional
Preferred Preference Common Paid-In Treasury
(In thousands) Stock Stock Stock Capital Stock
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993
As previously reported $ - $9 $172,470 $226,528 $ (47,350)
Pooling of interests with Tyco 16,946 276,307
Net income
Five-for-four stock split 44,653 (44,653)
Purchase of treasury stock (80,885)
Conversion of 8% debentures 5,897 67,549
Restricted stock activity 1,915
Exercise of stock options 267 26,681
Issuance of treasury stock (38,031) 74,423
Issuance of preferred stock 48 46,952
Payment for tendered Fisher-Price warrants (4,891)
Dividends declared on common stock
Dividends declared on preferred and
preference stock 1 1,510
Collection of ESOP note receivable
Currency translation and other adjustments
--------- ---------- -------- -------- ---------
Balance, December 31, 1994 49 9 240,233 559,867 (53,812)
Net income
Five-for-four stock split 55,794 (55,794)
Purchase of treasury stock (64,284)
Repurchase of Series F Preference Stock (9) (73,857)
Restricted stock activity 20 8,237
Exercise of stock options 33 8,715
Issuance of treasury stock (18,169) 42,522
Dividends declared on common stock
Dividends declared on preferred and
preference stock 3 3,151
Currency translation and other adjustments
--------- ---------- -------- -------- ---------
Balance, December 31, 1995 52 - 296,080 432,150 (75,574)
Net income
Purchase of treasury stock (269,771)
Restricted stock activity 2,770 (6,627)
Exercise of stock options 11 26,414
Issuance of treasury stock (53,554) 124,315
Issuance of stock warrant 26,444
Issuance of preferred stock 773 91,929
Exercise of Fisher-Price warrants (9,507) 11,658
Dividends declared on common stock
Dividends declared on preferred stock 2 1,650
Currency translation and other adjustments
--------- ---------- -------- -------- ---------
Balance, December 31, 1996 $827 $- $296,091 $518,296 $(215,999)
========= ========== ======== ======== =========
<FN>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 11.
<CAPTION>
Currency
ESOP Translation Total
Retained Note Deferred and Other Shareholders'
(In thousands) Earnings Receivable Compensation Adjustments Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993
As previously reported $ 532,003 $(3,500) $(13,003) $(49,348) $ 817,809
Pooling of interests with Tyco 9,342 (23,101) 279,494
Net income 224,670 224,670
Five-for-four stock split -
Purchase of treasury stock (80,885)
Conversion of 8% debentures 73,446
Restricted stock activity 13,003 14,918
Exercise of stock options 26,948
Issuance of treasury stock 36,392
Issuance of preferred stock 47,000
Payment for tendered Fisher-Price warrants (4,891)
Dividends declared on common stock (45,618) (45,618)
Dividends declared on preferred and
preference stock (6,846) (5,335)
Collection of ESOP note receivable 3,500 3,500
Currency translation and other adjustments (1,671) (1,671)
---------- -------- -------- -------- ----------
Balance, December 31, 1994 713,551 - - (74,120) 1,385,777
Net income 337,889 337,889
Five-for-four stock split -
Purchase of treasury stock (64,284)
Repurchase of Series F Preference Stock (73,866)
Restricted stock activity 8,257
Exercise of stock options 8,748
Issuance of treasury stock 24,353
Dividends declared on common stock (50,253) (50,253)
Dividends declared on preferred and
preference stock (6,542) (3,388)
Currency translation and other adjustments (21,553) (21,553)
---------- -------- -------- -------- ----------
Balance, December 31, 1995 994,645 - - (95,673) 1,551,680
Net income 372,224 372,224
Purchase of treasury stock (269,771)
Restricted stock activity (3,857)
Exercise of stock options 26,425
Issuance of treasury stock 70,761
Issuance of stock warrant 26,444
Issuance of preferred stock 92,702
Issuance of Fisher-Price warrants 2,151
Dividends declared on common stock (65,825) (65,825)
Dividends declared on preferred stock (7,391) (5,739)
Currency translation and other adjustments 8,728 8,728
---------- -------- -------- -------- ----------
Balance, December 31, 1996 $1,293,653 $ - $ - $(86,945) $1,805,923
========== ======== ======== ======== ==========
<FN>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 11.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Mattel, Inc. and Subsidiaries
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Principles of Consolidation and Basis of Preparation
- ----------------------------------------------------
The consolidated financial statements include the accounts of Mattel, Inc.
and its subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation, and
certain amounts in the financial statements for prior years have been
reclassified to conform with the current year presentation. Investments in
joint ventures and other companies are accounted for by the equity method
or cost basis depending upon the level of the investment and/or the
Company's ability to exercise influence over operating and financial
policies. Financial data for all periods presented reflect the retroactive
effect of the merger, accounted for as a pooling of interests, with Tyco
consummated in March 1997.
Preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of foreign subsidiaries are translated into US
dollars at fiscal year-end exchange rates. Income, expense and cash flow
items are translated at weighted-average exchange rates prevailing during
the fiscal year. The resulting currency translation adjustments are
recorded as a component of shareholders' equity.
Quasi-Reorganization
- --------------------
Effective December 26, 1987, the Company implemented a quasi-reorganization
and revalued its assets and liabilities to their fair values as of that
date. The $69.0 million net effect of these adjustments was credited to
additional paid-in capital. Additionally, as of December 26, 1987,
accumulated deficits of $256.0 million and cumulative currency translation
adjustments of $32.7 million were transferred to additional paid-in
capital.
Cash
- ----
Cash includes cash equivalents, which are highly liquid investments with
maturities of three months or less when purchased. Because of the short
maturities of these instruments, the carrying amount is a reasonable
estimate of fair value.
Marketable Securities
- ---------------------
Marketable securities, comprised principally of US dollar-denominated
foreign debt securities held for liquidity purposes, are stated at market
value and classified as securities available-for-sale. Unrealized gains or
losses are reported as a component of shareholders' equity until realized.
Quoted market prices, which approximated cost as of the balance sheet date,
are reasonable estimates of the portfolio's fair value.
Inventories
- -----------
Inventories, net of an allowance for excess quantities and obsolescence,
are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over estimated useful lives of 10 to 50 years for
buildings, 18 months to 10 years for machinery and equipment, and 10 to
20 years, not to exceed the lease term, for leasehold improvements. Tools,
dies and molds are amortized using the straight-line method over 18 months
to 3 years. The Company's capitalized warehouse facility lease in
existence at the time of the quasi-reorganization is recorded at its fair
value determined as of December 26, 1987, less accumulated amortization
computed over the remaining lease term.
Intangibles and Long-Lived Assets
- ---------------------------------
Intangible assets consist of the excess of purchase price over the fair
value of net assets acquired in purchase acquisitions, and the costs of
acquired patents and trademarks. Intangible assets are amortized using the
straight-line method over periods ranging from 18 months to 40 years.
Accumulated amortization was $165.5 million and $131.9 million as of
December 31, 1996 and 1995, respectively.
In the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
--------------------------------
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This
- -------------------------------------------------------------
statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. In accordance with this statement, the Company periodically
reviews the carrying value of its fixed and intangible assets to identify
and assess any impairment by evaluating the operating performance and
future undiscounted cash flows of the underlying assets.
Revenue Recognition
- -------------------
Net sales are recognized when products are shipped. Accruals for customer
discounts and rebates are recorded as the related revenues are recognized.
Advertising Costs
- -----------------
Costs incurred in producing media advertising are expensed the first time
the advertising takes place. Advertising costs associated with customer
benefit programs are accrued as the related revenues are recognized.
Stock-Based Compensation
- ------------------------
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
--------------------------
Compensation ("SFAS No. 123"). The Company has adopted the disclosure-only
- ------------
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized in the results of operations for nonqualified stock options
granted under the Company's plans as such options are granted at not less
than the quoted market price of the Company's common stock on the date of
grant.
Income Taxes
- ------------
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities, applying enacted
statutory tax rates in effect for the year in which the differences are
expected to reverse.
Income and Dividends Per Common Share
- -------------------------------------
All share and per share data presented in these financial statements
reflect the retroactive effects of the March 1997 Tyco merger and the
five-for-four stock splits distributed in March 1996 and January 1995.
Income per common share is computed by dividing earnings available to
common shareholders by the average number of common and common equivalent
shares outstanding during each period. Weighted-average share computations
assume the exercise of dilutive stock options and warrants, reduced by the
number of shares which could be repurchased at average market prices with
proceeds from exercise. Earnings available to common shareholders
represent reported net income less preferred and preference stock dividend
requirements, as applicable.
Foreign Currency Contracts
- --------------------------
The Company enters into foreign currency forward exchange contracts and
swap agreements as hedges to limit the effect of exchange rate fluctuations
on the results of operations and cash flows. Gains and losses related to
hedged transactions, which qualify for hedge accounting, are deferred and
are recognized in the results of operations as part of the underlying
transaction. Unhedged transactions and contracts that do not qualify for
hedge accounting are marked to market with gains and losses recognized in
the results of operations currently.
NOTE 2 - INCOME TAXES
- ---------------------
Consolidated pre-tax income consists of the following (in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
US operations $206,668 $277,884 $173,220
Foreign operations 330,088 226,784 188,937
---------- ---------- ----------
$536,756 $504,668 $362,157
========== ========== ==========
</TABLE>
The provision for current and deferred income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $ 89,781 $ 84,800 $ 76,100
State 13,200 14,900 12,100
Foreign 64,165 52,595 48,539
--------- --------- ---------
167,146 152,295 136,739
--------- --------- ---------
Deferred
Federal 549 16,506 2,129
State 1,000 300 1,723
Foreign (4,163) (2,322) (3,104)
--------- --------- ---------
(2,614) 14,484 748
--------- --------- ---------
Total provision for income taxes $164,532 $166,779 $137,487
========= ========= =========
</TABLE>
Deferred income taxes are provided principally for certain reserves,
depreciation, employee compensation-related expenses and certain other
expenses that are recognized in different years for financial statement and
income tax purposes. The Company's deferred income tax assets
(liabilities) were comprised of the following (in thousands):
<TABLE>
<CAPTION>
As of Year End
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Operating loss and tax credit carryovers $ 91,899 $125,983
Sales allowances and inventory reserves 75,887 69,656
Deferred compensation 26,360 20,732
Excess of tax basis over book basis 14,082 15,427
Postretirement benefits 12,765 12,840
Restructuring and integration charges 2,338 6,193
Other 37,773 31,651
------------ ------------
Gross deferred income tax assets 261,104 282,482
------------ ------------
Excess of book basis over tax basis (13,038) (14,636)
Retirement benefits (10,281) (8,905)
Depreciation (2,197) (3,728)
Other (11,018) (6,327)
------------ ------------
Gross deferred income tax liabilities (36,534) (33,596)
Deferred income tax asset valuation
allowances (56,603) (83,533)
------------ ------------
Net deferred income tax assets $167,967 $165,353
============ ============
</TABLE>
Management considered all available evidence and determined that a
valuation allowance of $56.6 million was required as of December 31, 1996
for certain tax credit and net operating loss carryforwards which would
likely expire prior to their utilization. However, management feels it is
more likely than not that the Company will generate sufficient taxable
income in the appropriate carryforward periods to realize the benefit of
the remaining net deferred tax assets of $168.0 million.
Differences between the provision for income taxes at the United
States federal statutory income tax rate and the provision in the
consolidated statements of income were as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Provision at federal statutory rates $ 187,864 $ 176,634 $ 126,755
Increase (decrease) resulting from:
Losses without income tax benefit 835 (2,784) 253
Foreign earnings taxed at different
rates, including withholding taxes (30,517) (15,732) (156)
State and local taxes, net of
federal benefit 9,230 10,603 6,693
Dividends paid to ESOP - (1,170) (1,600)
Other (2,880) (772) 5,542
---------- ---------- ----------
Total provision for income taxes $ 164,532 $ 166,779 $ 137,487
========== ========== ==========
</TABLE>
Appropriate US and foreign income taxes have been provided for
earnings of foreign subsidiary companies that are expected to be remitted
in the near future. The cumulative amount of undistributed earnings of
foreign subsidiaries which the Company intends to permanently invest and
upon which no deferred US income taxes have been provided is $783.6 million
at December 31, 1996. The additional US income tax on the unremitted
foreign earnings, if repatriated, would be offset in whole or in part by
foreign tax credits. Foreign withholding taxes of $30.2 million would be
due upon remittance of these earnings.
As of December 31, 1996, Tyco had US net operating loss carryforwards
for federal income tax purposes of $46.8 million, exclusive of the net
operating loss carryforward attributable to the acquisition of Universal
Matchbox LTD. ("Matchbox") discussed below. These net operating loss
carryforwards are available to reduce future federal taxable income and
expire in the years from 2008 to 2010. These loss carryforwards are
subject to an annual limitation, but the Company expects to utilize these
losses before the expiration of their carryforward periods.
In addition, the Matchbox companies have US net operating loss
carryforwards of approximately $46.7 million which will expire during the
years 2001 to 2004. These Matchbox loss carryforwards are subject to an
annual limitation and the Company expects to utilize these losses before
the expiration of their carryforward periods. Accordingly, the goodwill
reported in the consolidated balance sheets attributable to Tyco's 1991
acquisition of Matchbox has been reduced to reflect the adjustment related
to the tax effect of these losses.
Certain foreign subsidiaries have net operating loss carryforwards
totaling $148.2 million ($105.5 million with no expiration date, $32.6
million expiring 1997 to 2001, and $10.1 million expiring after 2001).
Generally accepted accounting principles require that tax benefits
related to the exercise by employees of nonqualified stock options be
credited to additional paid-in capital. In 1996, 1995 and 1994,
nonqualified stock options exercised resulted in credits to additional
paid-in capital totaling $26.3 million, $8.5 million and $23.9 million,
respectively. Virtually none of the nonqualified stock options exercised
in this period were attributable to Tyco.
The Internal Revenue Service has completed its examination of Mattel's
and Tyco's federal income tax returns through December 31, 1991 and December
31, 1992, respectively.
NOTE 3 - EMPLOYEE BENEFITS
- --------------------------
The Company and certain of its subsidiaries have various retirement plans
covering substantially all employees of these companies. Expense related
to these plans totaled $16.2 million, $16.1 million and $14.6 million in
1996, 1995 and 1994, respectively. Prior to the November 1993 merger,
Fisher-Price maintained a number of benefit plans and compensation
arrangements. Pursuant to change-in-control provisions, the Fisher-Price
Pension Plan shall continue to be maintained by Fisher-Price without
material change or modification for a period of five years following the
merger. At the time of the merger, Tyco maintained certain benefit plans
which are required to be continued by the Company for a six-month period
following the merger. Activity related to Tyco's benefit plans was not
significant during any year.
Pension Plans
- -------------
The Company provides defined benefit pension plans, which satisfy the
requirements of the Employee Retirement Income Security Act of 1974
("ERISA"), covering certain of its domestic and foreign employees. Plan
benefits are based upon covered employees' length of service and earnings.
Pension costs are actuarially determined and plans are generally funded to
meet benefit obligations existing as of the end of each year.
Contributions are based upon amounts required to be funded under applicable
governmental regulations, but will not exceed the maximum amount deductible
for income tax purposes. Assets of these plans are invested in equity
securities, as well as corporate, government and other fixed-income
investments. With the exception of the Fisher-Price Pension Plan, activity
related to the Company's pension plans, including those of foreign
affiliates, was not significant during any year.
The Fisher-Price Pension Plan, a defined benefit plan covering most of
the domestic employees of Fisher-Price, contains certain change-of-control
provisions which were triggered as a result of the November 1993 merger.
For a five-year period, or until the assets of the plan are less than its
liabilities, if earlier, the rate at which benefits accrue on behalf of
participants may not be decreased. In the event of the plan's termination
or consolidation with another plan, assets in excess of liabilities must be
used to increase participants' benefits. The components of net pension
cost for this plan, based upon an October valuation date for the years
ended December 31, 1996, 1995 and 1994, are detailed below (in thousands):
<TABLE>
<CAPTION>
For the Period Ended
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost $ 2,671 $ 2,547 $ 3,562
Interest cost 8,866 7,924 7,646
Actual (gain) loss on plan assets (16,997) (30,650) 1,038
Net amortization and deferral (206) 16,881 (14,221)
---------- ---------- ----------
Net pension income $ (5,666) $ (3,298) $ (1,975)
========== ========== ==========
</TABLE>
Reconciliation of the funded status of Fisher-Price's domestic pension
plan to the related prepaid asset included in the consolidated balance
sheets are as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
----------------------
1996 1995
---------- -----------
<S> <C> <C>
Vested benefits $122,113 $115,573
Nonvested benefits 3,498 3,126
---------- -----------
Accumulated benefit obligation 125,611 118,699
Effect of projected future salary
increases 5,768 4,862
---------- -----------
Projected benefit obligation 131,379 123,561
Plan assets at fair value 157,507 144,718
--------- ---------
Plan assets in excess of projected
benefit obligation 26,128 21,157
Unrecognized net loss 2,046 3,769
Unrecognized prior service cost 1,904 2,055
Unrecognized net asset at transition (6,423) (8,992)
--------- ---------
Prepaid pension asset $ 23,655 $ 17,989
========== ===========
<CAPTION>
For the Period
----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Assumptions:
Weighted average discount rate 7.75% 7.25% 8.50%
Rate of future compensation increases 4.00% 4.00% 4.00%
Long-term rate of return on plan
assets 11.00% 10.00% 10.00%
- ----------------------------------------------------------------
</TABLE>
Other Retirement Plans
- ----------------------
Domestic employees are eligible to participate in the Company's 401(k)
savings plans, which are defined contribution plans satisfying ERISA
requirements. Under these plans, the Company makes contributions to a
trust based upon the employee's age and matches a portion of certain
amounts of voluntary employee contributions. Employees of Mattel are
covered by either the Mattel, Inc. Personal Investment Plan or the Mattel,
Inc. Hourly Employee Personal Investment Plan. Effective April 1, 1997,
the Fisher-Price, Inc. Matching Savings Plan, which covers employees of
Fisher-Price, was merged and all of its assets were transferred into the
Mattel, Inc. Personal Investment Plan.
The Company maintains unfunded supplemental executive retirement plans
which are nonqualified defined benefit plans covering certain key
executives of Mattel, Inc. and its subsidiaries. For 1996, 1995 and 1994,
the accumulated and vested benefit obligations and related expense of these
plans were not significant.
Deferred Compensation and Excess Benefit Plans
- ----------------------------------------------
The Company provides a deferred compensation plan which permits certain
officers and key employees of Mattel, Inc. to elect to defer portions of
their compensation. The deferred compensation plan, together with certain
Company and employee contributions made to an excess benefit plan, earn
various rates of return. The liability for these plans as of December 31,
1996 and 1995 was $29.4 million and $16.2 million, respectively. The
Company's contribution to these plans and the related administrative
expense were not significant to the results of operations during any year.
In August 1996, the Company purchased group trust-owned life insurance
contracts designed to assist in funding these programs. The cash surrender
value of these policies, valued at $25.1 million as of December 31, 1996,
are held in an irrevocable rabbi trust which is included in sundry assets
in the consolidated balance sheets.
Employee Stock Ownership Plan
- -----------------------------
In connection with the February 1992 merger, International Games, Inc.
("IGI") convertible preferred stock held by the IGI ESOP was exchanged for
55.8 thousand shares of the Company's common stock and 864.3 thousand
shares of the Company's 12.5% Convertible Preference Stock, Series F. The
ESOP debt was repaid in August 1994 through a series of dividend and cash
contributions paid by the Company to service the debt. On October 20,
1995, the Company repurchased all shares of Series F and common stock from
the ESOP for a total of $75.1 million. All benefits due to participants
have been distributed, and the ESOP was terminated in 1996.
Postretirement Benefits
- -----------------------
The Company maintains a contributory postretirement benefit plan for
domestic employees of Mattel. The plan provides for certain medical,
dental and life insurance benefits to retirees meeting certain age and
years of service requirements. The ongoing costs and obligations
associated with the Mattel, Inc. plan are not significant to the Company's
financial position and results of operations during any year.
Fisher-Price has an unfunded postretirement health insurance plan
covering certain eligible domestic employees hired prior to January 1,
1993. Employees who retired or elected to retire before January 1, 1994
and employees whose age-plus-service was equal to 70 years by December 31,
1993 may continue to participate, for their lifetime, in the Fisher-Price
group health insurance plan at the same contribution rate as active
employees. Other employees, who were active at December 31, 1992, who do
not satisfy the criteria outlined above participate in a retiree medical
account balance plan. The account balance will become available upon a
participant's retirement at age 55 or anytime thereafter with five years of
service, and may be used to purchase health care insurance and to pay for
health care expenses not reimbursed by insurance or Medicare. If an
employee terminates employment prior to satisfying the retirement criteria,
eligibility in either plan is forfeited and no benefits are paid. Any
employee hired or rehired on or after January 1, 1993 is not eligible to
receive postretirement health insurance coverage.
Details of the plan's expense recognized in the consolidated financial
statements for the years ended December 31, 1996, 1995 and 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost $ 344 $ 432 $ 511
Interest cost 2,494 2,539 1,826
Net amortization and deferral 2 - -
---------- ---------- ----------
Net postretirement benefit cost $2,840 $2,971 $2,337
========== ========== ==========
Amounts included in the Company's consolidated balance sheets for this
plan are as follows (in thousands):
<CAPTION>
As of Year End
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Current retirees $25,748 $28,418
Fully eligible active employees 1,982 2,502
Other active employees 5,452 4,305
---------- ----------
Accumulated postretirement benefit 33,182 35,225
obligation
Unrecognized net loss (1,596) (3,687)
---------- ----------
Accrued postretirement benefit liability $31,586 $31,538
========== ==========
</TABLE>
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.75%, 7.25% and 8.50% for 1996, 1995 and 1994,
respectively. For participants under 65 years of age, the health care cost
trend rate for expected claim costs was assumed to be 6.00% in 1996,
declining to 5.50% by 1997 and remaining constant thereafter. For
participants 65 years of age or older, the health care cost trend rate for
expected claim costs was assumed to be 5.50% in 1996 and remaining constant
thereafter. A one percentage point increase in the assumed health care
cost trend rate for each future year would have increased the aggregate of
service and interest cost for 1996 by approximately $0.3 million and
increased the accumulated postretirement benefit obligation as of December
31, 1996 by approximately $3.8 million.
Incentive Awards
- ----------------
The Company's Long-Term Incentive Plan is a three-year plan available to
certain key executives of Mattel, Inc. Interim awards are paid annually
based upon the financial performance of the Company over a three-year
period. At December 31, 1996, $3.9 million was accrued for awards under
the 1996 plan. As of December 31, 1995, $19.7 million was accrued for
final awards under the 1993 plan.
The Company also has discretionary annual incentive compensation plans
for officers and key employees of both Mattel, Inc. and Fisher-Price, Inc.
based on the Company's performance and subject to certain approvals of the
Compensation/Options Committee of the Board of Directors. At December 31,
1996 and 1995, $5.2 million and $17.8 million, respectively, were accrued
for awards under these plans.
Pursuant to the Company's 1990 Stock Option Plan, stock appreciation
rights ("SAR") had been awarded in 1991 to certain key executives of
Mattel, Inc. In February 1994, the value of the SAR was capped, and they
were canceled in exchange for awards consisting of nonqualified stock
options and cash, contingent upon the executive's continued employment by
the Company. Cash awards totaling $19.0 million were paid in two equal
installments and were eligible to be deferred as part of the deferred
compensation plan at the election of the executive. The first installment
was paid during 1995 and the final installment was paid during 1996. As of
December 31, 1995, $9.0 million was accrued for the SAR.
Prior to the merger, Tyco had a Long-Term Incentive Plan for certain
senior executives. Under this plan, Tyco awarded 160.0 thousand and 759.0
thousand Restricted Stock Units ("RSU") during 1996 and 1995, respectively.
The aggregate fair market value of the RSUs was being amortized to
compensation expense over the restriction period. At the time of the
merger, the RSUs were converted into approximately 244 thousand shares of
Mattel common stock per the terms of the Agreement and Plan of Merger
(which approximated the fair value of the RSUs on the merger consummation
date) and the remaining unamortized amount of $5.1 million was charged to
expense.
NOTE 4 - SEASONAL FINANCING AND LONG-TERM DEBT
- ----------------------------------------------
Seasonal Financing
- ------------------
Mattel maintains and periodically amends or replaces an unsecured revolving
credit agreement with a commercial bank group that is utilized to finance
the seasonal working capital requirements of its domestic and certain
international operations. The agreement in effect during 1996, which was
recently amended (see below), was renegotiated in the first quarter of 1996
to increase the total facility to $800.0 million from $650.0 million.
Within the facility, up to $400.0 million was a standard revolving credit
line available for advances and backup for commercial paper issuances (a
five-year facility). Interest was charged at various rates selected by the
Company not greater than the base rate charged by the agent bank, plus a
commitment fee of up to .09% of the unused line available for advances.
The remaining $400.0 million (a five-year facility) was available for
nonrecourse purchases of certain trade accounts receivable of Mattel by the
commercial bank group providing the credit line. Outstanding receivables
sold are reduced by collections and cannot exceed the $400.0 million at any
time. The uncollected balance of receivables sold totaled $40.0 million
and $67.5 million at December 31, 1996 and 1995, respectively. The
agreement required Mattel to comply with certain financial covenants for
consolidated debt-to-capital, interest coverage and tangible net worth
levels.
During 1996, Mattel entered into and renewed agreements providing for
up to $140.0 million of nonrecourse purchases of certain trade accounts
receivable of the Company by a commercial bank at various purchase dates.
The uncollected balance of receivables sold totaled $131.0 million and
$79.5 million at December 31, 1996 and 1995, respectively.
Mattel also enters into agreements with banks of its foreign
subsidiaries for nonrecourse sales of its foreign subsidiary receivables.
The uncollected balances of foreign receivables sold as of December 31,
1996 and 1995 each totaled $222.0 million.
To meet seasonal borrowing requirements of international operations in
addition to amounts funded by proceeds of its revolving credit agreement,
Mattel negotiates individual financing arrangements, generally with the
same groups of banks that provided credit in the prior year. International
credit lines total approximately $324.6 million, a portion of which is used
to support letters of credit. The Company expects to extend these credit
lines throughout 1997 and believes available amounts will be adequate to
meet its seasonal financing requirements.
During 1996, Tyco had domestic and foreign revolving credit facilities
in the aggregate amount of $90.0 million and a $200.0 million domestic
receivables securitization facility. The revolving credit facilities were
secured by a lien on substantially all of Tyco's domestic assets and were
also guaranteed by certain of its foreign subsidiaries. Interest rates on
borrowings were determined at Tyco's option based on various indices,
including LIBOR or bankers' acceptance rate, plus 2.5%. Under the domestic
receivables securitization facility, Tyco sold substantially all of its
domestic accounts receivable to wholly-owned, bankruptcy remote
subsidiaries which were consolidated in the financial statements of the
Company. These subsidiaries purchased the accounts receivable with
proceeds from borrowings under a commercial paper facility (limited to a
maximum of 75% of eligible accounts receivable, as defined) and certain
deferred payments. The interest rate on the facility was the market rate
for commercial paper plus 130 basis points.
During the fourth quarter of 1996, Tyco was not in compliance with
certain financial covenants under the revolving credit and securitization
facilities, as amended, and received waivers from the lender and its
affiliates. Tyco further amended these facilities to reflect revisions to
its financial covenants. Upon consummation of the March 1997 merger, these
facilities were terminated by Mattel.
Additionally, certain foreign subsidiaries of Tyco had agreements with
various banks which provided credit lines of $74.4 million and $35.8
million as of December 31 ,1996 and 1995, respectively. Upon consummation
of the merger, borrowings under these credit lines were repaid and the
agreements were terminated.
Interest rates charged on the Company's working capital credit lines
are adjusted on a periodic basis; therefore, the carrying amounts of such
obligations are a reasonable approximation of their fair value.
Information relating to Mattel and Tyco's domestic and international credit
lines is summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at end of year
Domestic $ - $ 39,759 $ 33,315
International 28,924 36,684 24,216
Maximum amount outstanding
Domestic 567,000 500,000 670,000
International 113,000 124,000 107,000
Average borrowing
Domestic 215,000 284,000 327,000
International 72,000 69,000 68,000
Weighted average interest rate
on average borrowing
Domestic (computed daily) 6.6% 7.3% 7.5%
International (computed monthly) 11.6% 12.2% 12.7%
- ---------------------------------------------------------------------
</TABLE>
Effective in March 1997, Mattel amended its revolving credit
agreement. The new agreement consists of unsecured facilities providing a
total of $1.0 billion in seasonal financing from substantially the same
group of commercial banks. The facilities provide for up to $600.0 million
in advances and backup for commercial paper issuances (a five-year
facility), and up to an additional $400.0 million (a five-year facility)
for nonrecourse purchases of certain trade accounts receivable by the bank
group. In connection with the agreement, Mattel is to comply with certain
financial covenants for consolidated debt-to-capital and interest coverage.
6-7/8% Senior Notes
- -------------------
In August 1992, the Company issued $100.0 million aggregate principal
amount of 6-7/8% Senior Notes maturing August 1, 1997. Interest is payable
semiannually on the first day of February and August. As of December 31,
1996, the 6-7/8% Senior Notes are included in the current portion of long-
term liabilities in the consolidated balance sheets. At December 31, 1996
and 1995, the bid prices for the 6-7/8% Senior Notes, as provided by one of
the underwriters, were $1,005.50 and $1,020.40, respectively, based on a
par value of $1,000.00.
6-3/4% Senior Notes
- -------------------
In May 1993, the Company issued $100.0 million aggregate principal amount
of 6-3/4% Senior Notes maturing May 15, 2000. Interest is payable
semiannually on the fifteenth day of May and November. At December 31,
1996 and 1995, the bid prices for the 6-3/4% Senior Notes, as provided by
one of the underwriters, were $1,007.70 and $1,033.40, respectively, based
on a par value of $1,000.00.
10-1/8% Senior Subordinated Notes ("10-1/8% Notes")
- ---------------------------------------------------
In August 1992, Tyco issued $126.5 million aggregate principal amount of
10-1/8% Notes maturing August 15, 2002. Interest is payable semiannually
on the fifteenth day of February and August. The terms of the 10-1/8%
Notes provide for early redemption at the option of the issuer, in whole or
in part, at anytime on or after August 15, 1997 at redemption prices equal
to 103.797% of the principal amount reducing annually to 100% by August 15,
2000. At December 31, 1996 and 1995, the fair values of the 10-1/8% Notes,
based on quoted market prices, were $1,048.80 and $903.75, respectively,
based on a par value of $1,000.00. The Company assumed Tyco's obligations
related to the 10-1/8% Notes upon consummation of the merger.
Medium-Term Notes ("MT Notes")
- ------------------------------
During the 1994 third quarter, the Company commenced a program for the
issuance of up to $250.0 million in aggregate principal amount of Series A
Medium-Term Notes. During the 1994 fourth quarter, the Company issued an
aggregate of $80.5 million principal amount of MT Notes maturing on various
dates from October 1999 to December 2004. Interest is payable semiannually
at fixed rates ranging from 8.00% to 8.55% per annum on the fifteenth day
of May and November. At December 31, 1996 and 1995, the bid prices for
these notes ranged from $1,041.00 to $1,096.60 and $1,075.00 to $1,159.30,
respectively, based on a par value of $1,000.00. In 1994, the Company also
issued an aggregate of $30.0 million principal amount of floating rate MT
Notes which matured in January 1996.
During 1995, an aggregate of $139.5 million principal amount of MT
Notes was issued by the Company maturing on various dates from June 1998 to
May 2007. Interest is payable semiannually at fixed rates ranging from
5.93% to 7.65% per annum on the fifteenth day of May and November. At
December 31, 1996 and 1995, the bid prices for these notes ranged from
$998.70 to $1,040.90 and $1,006.50 to $1,081.60, respectively, based on a
par value of $1,000.00.
7% Convertible Subordinated Notes ("7% Notes")
- ----------------------------------------------
In September 1991, Tyco issued $13.5 million aggregate principal amount of
convertible subordinated notes bearing interest at 7% per annum which are
to be repaid in four equal annual installments commencing July 18, 1998.
The Company assumed Tyco's obligations related to the 7% Notes upon
consummation of the merger. Interest is payable semiannually on the last
day of June and December. In 1995 and 1994, $1.1 million and $1.4 million,
respectively, of additional 7% Notes were issued by Tyco in lieu of cash
interest payments. Interest will cease to accrue when the average of the
closing sale price of Mattel common stock for 60 consecutive trading days
is equal to or above $32.73590 per share. The 7% Notes are convertible at
a price of $17.96 per common share, subject to adjustment per the terms of
the note, into approximately 0.9 million common shares as of December 31,
1996 and 1995. At December 31, 1996 and 1995, the carrying amount of the
7% Notes is considered to approximate its fair value based upon rates
available to Tyco for issuance of debt with similar terms and maturity
dates.
Mortgage Note
- -------------
In 1990, the Company borrowed $45.0 million under a mortgage agreement
secured by its headquarters office facility in El Segundo, California. The
agreement requires monthly interest-only payments for the first 60 months
of its term and monthly principal and interest payments of approximately
$0.4 million thereafter, until its December 2005 maturity date. Interest
is payable at 10.15% for the term of the agreement. The fair value of the
mortgage note, estimated by discounting future cash flows at the interest
rates currently available for debt with the same credit rating, similar
terms and maturity date, was approximately $53 million and $51 million at
December 31, 1996 and 1995, respectively.
Scheduled Maturities
- --------------------
The aggregate amounts of long-term debt and capitalized lease obligations
maturing in the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
Senior and Medium- Capitalized
Subordinated Term Mortgage Lease
Debt Notes Notes Obligations Other Total
------------ ---------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997 $100,000 $ - $1,000 $100 $5,500 $106,600
1998 4,000 9,500 1,000 600 700 15,800
1999 4,000 30,000 1,100 100 600 35,800
2000 104,000 - 1,100 - 700 105,800
2001 4,000 30,500 1,200 - 600 36,300
- -----------------------------------------------------------------------------
</TABLE>
NOTE 5 - SHAREHOLDERS' EQUITY
- -----------------------------
Preference Stock and Preference Share Purchase Rights
- -----------------------------------------------------
The Company is authorized to issue 20.0 million shares of $0.01 par value
preference stock, of which none is currently outstanding. In February
1992, 1.5 million shares of $0.01 par value preference stock were
designated as Series E Junior Participating Preference Stock in connection
with a distribution of Preference Share Purchase Rights to the Company's
common shareholders. Series E shares are issuable only when rights become
exercisable under the Preference Share Purchase Rights plan (see below).
In 1992, the Board of Directors approved an extension of the
Company's Preference Share Purchase Rights plan. The rights may be
exercised by their holders to purchase shares of the Company's Series E
Junior Participating Preference Stock upon the occurrence of certain
events, including the acquisition, or announcement of intended acquisition,
of 20% or more of Mattel's common stock by a person or group of affiliated
or associated persons. The rights are subject to adjustment in the event
of stock dividends, stock splits or other changes in the Company's common
stock, and will expire on February 17, 2002, unless the plan is further
extended or the rights are earlier redeemed or exchanged by the Company.
In connection with the IGI merger in February 1992, 864.3 thousand
shares of $0.01 par value preference stock were designated as 12.5%
Convertible Preference Stock, Series F, and issued to the IGI ESOP. On
October 20, 1995, the Company repurchased all outstanding preference stock
from the IGI ESOP for $73.9 million. The ESOP note receivable, which was
secured by the Series F Preference Stock, was repaid in August 1994.
Preferred Stock
- ---------------
The Company is authorized to issue 3.0 million shares of $1.00 par value
preferred stock, of which 826.4 thousand shares are currently outstanding.
- Series B Voting Convertible Exchangeable Preferred Stock ("Series B
Preferred Stock")
- ----------------------------------------------------------------------
During 1994, Tyco received net proceeds of $47.0 million from the sale of
47.6 thousand shares of Series B Preferred Stock to a private investment
group. Each share of Series B Preferred Stock was converted into like
Mattel preferred stock as a result of the March 1997 merger. The par value
and liquidation preference of the Series B Preferred Stock are $1.00 and
$1,050.00 per share, respectively. Dividends are cumulative and payable in
cash on the first day of each calendar quarter at the rate of 6% of the
liquidation preference per annum. Until April 15, 1996, Tyco paid these
dividends in the form of additional shares of Series B Preferred Stock.
Dividends issued in shares in lieu of cash during 1996, 1995 and 1994 were
valued at $1.7 million (or 1.6 thousand shares), $3.2 million (or 3.0
thousand shares) and $1.5 million (or 1.4 thousand shares), respectively.
The Series B Preferred Stock is convertible, at the option of the
holders, into Mattel common stock at a conversion price of approximately
$20.46 per common share, subject to adjustment under certain conditions.
Commencing in April 1999, the Series B Preferred Stock will be exchangeable,
at the option of the holders, into Mattel common stock during designated
periods at the exchange price obtained by dividing the liquidation preference
by the average closing price of Mattel common stock during the 20 trading days
prior to the date of exchange, but at not less than approximately $10.23
per common share. The Company has the option at any time to exchange the
Series B Preferred Stock for 6% convertible subordinated notes due 2004.
Provided that the average closing price of Mattel common stock exceeds or
is equal to specified percentages of the current conversion price, the
Company, at its option, may redeem the Series B Preferred Stock at any
time on or after April 15, 1997 for an amount in cash equal to 105.25% of
the liquidation preference reducing annually to 100% of the liquidation
preference on April 15, 2004, the mandatory redemption date. On that date,
the mandatory redemption price shall be paid, at the Company's option, in
cash or in shares of Mattel common stock.
Holders of the Series B Preferred Stock are entitled to vote (on an
as-converted basis) with the holders of common stock and Series C Preferred
Stock as a single class on all matters on which the holders of the
Company's common stock may vote. In addition, the holders have certain
demand and incidental registration rights with respect to the Series B
Preferred Stock, any common stock issued upon conversion of such preferred
stock or any notes issued in exchange for such preferred stock.
- Series C Mandatorily Convertible Redeemable Preferred Stock ("Series C
Preferred Stock")
- -------------------------------------------------------------------------
On June 28, 1996, Tyco received net proceeds of $92.7 million from the sale
of 772.8 thousand shares of Series C Preferred Stock. Each share of Series
C Preferred Stock was converted into like Mattel preferred stock as a
result of the March 1997 merger. The par value and liquidation preference
of the Series C Preferred Stock are $1.00 and $125.00 per share, respectively.
Dividends are cumulative and payable in cash on the first day of each
calendar quarter at the rate of $10.3125 per annum. Series C Depositary
Shares ("Depositary Shares"), each representing one twenty-fifth of a share
of Series C Preferred Stock, totaling 19.3 million shares, were sold by the
depositary as part of the above offering at an issue price of $5.00 per
share. Each Depositary Share was converted into a like Mattel depositary
share as a result of the March 1997 merger.
Shares of the Series C Preferred Stock (and the related Depositary Shares)
are convertible, at the option of the holders, at any time prior to July 1,
2000 into Mattel common stock at a rate of 0.40064 common shares for each
Depositary Share, subject to adjustment under certain conditions. The
Company, at its option, may redeem the Series C Preferred Stock (and the
related Depositary Shares) at any time on or after July 1, 1999 for a
number of Mattel common shares equal to the call price (which is initially
set at $5.103 per Depositary Share and declines at specified times to
$5.000 per Depositary Share as of June 30, 2000) divided by the current
market price of Mattel common stock (as defined in the Certificate of
Designations) or 0.40064 common shares for each Depositary Share, whichever
is greater. On July 1, 2000, shares of the Series C Preferred Stock (and the
related Depositary Shares) are mandatorily convertible into 0.54301 Mattel
common shares for each Depositary Share.
The Series C Preferred Stock entitles the holders of Depositary Shares
to vote (at the rate of 0.48876 common shares for each Depositary Share)
with the holders of the Company's common stock as a single class on all
matters on which the holders of the Company's common stock may vote.
Common Stock
- ------------
In May 1996, the shareholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation that increased the number
of shares of authorized common stock from 300.0 million to 600.0 million in
order to accommodate issuance of common stock in connection with possible
future mergers and other financing transactions, future stock dividends or
splits, future awards pursuant to the Company's stock option plans, warrant
exercises, and other general corporate purposes.
Stock Compensation Plans
- ------------------------
In May 1996, the shareholders of the Company approved the Mattel 1996 Stock
Option Plan. Under this plan, incentive stock options, nonqualified stock
options, stock appreciation rights, nonvested stock awards, and shares of
common stock may be granted to officers, key employees, and other persons
providing services to the Company. In addition, nonqualified stock options
may be granted to members of the Company's Board of Directors who are not
employees of the Company.
Generally, options are exercisable contingent upon the grantees'
continued employment with the Company. Nonqualified stock options are
granted at not less than 100% of the fair market value of the Company's
common stock on the date of grant, generally vest at the rate of 25% per
year of service, and usually expire within ten years from the date of
grant. The 1996 Stock Option Plan provides that up to 1.5% of Mattel's
outstanding common stock as of the first day of each calendar year will be
available for awards under the plan. Any unused portion of the percentage
limit for any calendar year shall be carried forward and made available for
awards in succeeding calendar years. The aggregate number of shares of
common stock available for grants under the 1996 plan shall not exceed 50.0
million shares. This plan expires on December 31, 2005. The Company's
previous plans, the 1978, 1982, and 1990 Stock Option Plans, expired on
April 12, 1988, April 14, 1992, and December 31, 1996, respectively. All
outstanding awards under these plans continue to be exercisable under the
terms of their respective grant agreements.
Prior to the merger, Tyco had various incentive and non-qualified
stock option plans that provided benefits for eligible participants.
Effective with the merger, all stock options previously granted and
outstanding under these plans were exchanged for approximately 363 thousand
Mattel common shares (which approximated the fair value of the options as
of the merger consummation date).
Both Mattel and Tyco adopted the disclosure-only provisions of SFAS
No. 123. Accordingly, no compensation cost has been recognized in the
results of operations for nonqualified stock options granted under these
plans during the years ended December 31, 1996, 1995 and 1994. Had
compensation cost for nonqualified stock options been determined based on
their fair value at the date of grant consistent with the method of
accounting prescribed by SFAS No. 123, the companies' combined net income
and earnings per share would have been reduced by $7.0 million or $0.02 per
share and $2.2 million or $0.01 per share in 1996 and 1995, respectively.
The pro forma effect on the combined companies' 1996 and 1995 net income is
not indicative of the pro forma effect in future years, because it does not
take into consideration the pro forma expense related to grants made prior
to 1995.
The fair value of Mattel options granted during 1996 and 1995 has been
estimated using the Black-Scholes pricing model. The following weighted-
average assumptions were used in determining fair value:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Expected life (in years) 3.17 3.17
Risk-free interest rate 6.05% 5.28%
Volatility factor 17.98% 19.23%
Dividend yield 0.82% 0.75%
- -------------------------------------------------------------
</TABLE>
The weighted average fair values of Mattel options granted during 1996
and 1995 were $5.12 and $3.25, respectively.
The following is a summary of stock option information and weighted-
average exercise prices for Mattel's stock option plans during the year
(options in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- --------------
Nonqualified Plans Number Price Number Price Number Price
- -------------------------- ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 14,513 $14.27 13,148 $12.73 15,616 $ 9.51
Options granted 4,294 25.15 4,152 16.99 3,803 15.76
Options exercised (5,267) 13.48 (2,314) 10.52 (6,126) 6.40
Options canceled (230) 16.67 (473) 13.63 (145) 13.24
------ ------ ------
Outstanding at December 31 13,310 $18.05 14,513 $14.27 13,148 $12.73
====== ====== ======
Exercisable at December 31 5,263 $14.41 5,541 $13.41 3,200 $11.89
====== ====== ======
Available for grant at
December 31 4,074 921 123
====== ====== ======
</TABLE>
The following table summarizes information about Mattel stock options
outstanding as of December 31, 1996 (options in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
- ---------------- ------ ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.84 to $10.01 357 3.68 years $ 5.41 357 $ 5.41
10.16 to 15.30 4,018 6.60 13.18 2,522 13.15
15.76 to 22.40 4,647 7.68 16.68 2,256 16.59
23.90 to 29.88 4,288 9.18 25.14 128 26.11
------ ------
$ 1.84 to $29.88 13,310 7.73 $18.05 5,263 $14.41
====== ======
</TABLE>
In December 1993, restricted stock awards totaling 927.7 thousand
shares were granted to key Mattel executives. During the time period from
the award date until January 1, 1997, when the restrictions lapsed, these
shares could not be sold, assigned, pledged or otherwise encumbered by the
recipients. During 1996, 244.1 thousand shares were forfeited and returned
to the Company. As of December 31, 1996, restricted stock awards in the
amount of 683.6 thousand shares were outstanding.
The market value of restricted stock awards as of December 31, 1994
was charged to income as part of the 1994 restructuring. Any subsequent
increases or decreases in market value through January 1, 1997, the end of
the restriction period, are reflected in the results of operations
currently. As a result, $2.8 million and $7.9 million were charged to
income in 1996 and 1995, respectively. In addition, as a result of the
forfeiture, $6.6 million of compensation expense that was recognized in
previous periods was reversed in 1996.
Fisher-Price Stock Subscription Warrants
- ----------------------------------------
In connection with their term loan, Fisher-Price issued to the lenders
detachable warrants allowing them to purchase shares of Fisher-Price common
stock, subject to certain antidilution requirements. As of the effective
date of the merger, the Company agreed to assume Fisher-Price's obligations
pursuant to the provisions of the warrants.
During June 1994, a holder of 451.0 thousand warrants elected to
receive $4.9 million in cash in lieu of common shares as a result of
change-of-control provisions triggered by the merger. In October 1996,
451.0 thousand warrants were exercised for an equal number of common shares
by a holder in accordance with the terms of the warrant agreement.
The exercise of all outstanding warrants by the holders would result
in delivery of 751.4 thousand shares of the Company's common stock at an
exercise price of approximately $4.77 per share. These warrants expire on
June 30, 2000.
Disney Warrant
- --------------
In June 1996, the Company entered into a licensing agreement with Disney
Enterprises, Inc. for an expanded strategic alliance, which grants the
Company exclusive worldwide rights (with certain exceptions) to produce
toys based on all children-oriented Disney television and film properties
introduced, commencing summer 1997. Pursuant to this agreement, the
Company issued Disney a warrant to purchase 3.0 million shares of the
Company's common stock at an exercise price of $27.375 per share. This
warrant cannot be exercised prior to April 2, 1999 and expires no later
than April 2, 2004. The fair value of the warrant will be charged to
income when the related properties are introduced as a component of royalty
expense over the period the related revenues are recognized. The warrant's
fair value of $26.4 million was determined using the Black-Scholes pricing
model, assuming an expected life of eight years, a dividend yield of 0.88%,
a risk-free interest rate of 6.17%, and a volatility factor of 27.60%.
Conversion of 8% Convertible Subordinated Debentures
- ----------------------------------------------------
During the 1994 first quarter, holders tendered $75.7 million of the 8%
Convertible Subordinated Debentures for conversion into 9.2 million common
shares in response to the Company's Notice of Redemption.
Common Stock Repurchase Plan
- ----------------------------
In February 1996, the Board of Directors approved a continuation of
Mattel's stock repurchase program to permit the annual repurchase of 8.8
million shares to fund the Company's stock option plans and provide for
warrant exercises. In October 1996, the Executive/Finance Committee of the
Board of Directors increased the number of shares to be repurchased during
1996 from 8.8 million to 10.0 million shares. For 1997, the Board of
Directors authorized the repurchase of 6.0 million to 7.0 million shares
under the plan.
Mattel's stock repurchase plan, initiated in May 1990 and expanded in
May 1993, provided for the repurchase of up to 19.5 million shares during
the four-year period ending in 1997. During 1995 and 1994, Mattel
repurchased 2.9 million and 4.7 million shares, respectively. In addition
to shares acquired on the open market, Mattel repurchased, during the
fourth quarter of 1995, the equivalent of 3.3 million shares of common
stock in connection with its cash payment to the IGI ESOP for all
outstanding shares of Series F Preference Stock.
Shares repurchased, less 5.3 million, 2.3 million, and 5.7 million
shares reissued in 1996, 1995 and 1994, respectively, are included in
treasury stock. During 1996, 244.1 thousand shares were returned to the
treasury as a result of forfeiture of restricted stock awards.
Dividends and Capital Transactions
- ----------------------------------
On February 6, 1996, the Board of Directors declared a five-for-four stock
split on Mattel's common stock, which was distributed on March 1, 1996.
Accordingly, $55.8 million was transferred from additional paid-in capital
to common stock, representing the par value of additional shares issued. A
similar transfer was made between additional paid-in capital and common
stock in the amount of $44.7 million reflecting the declaration of a five-
for-four stock split in December 1994.
A regular quarterly cash dividend has been declared by the Mattel
Board of Directors on the Company's common stock since the second quarter
of 1990. Tyco was precluded from paying cash dividends on its common stock
for the three years ended December 31, 1996 due to limitations set forth in
its revolving credit and domestic receivables securitization facilities,
and its 10-1/8% and 7% Notes agreements.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Leases
- ------
The Company routinely enters into noncancelable lease agreements for
premises and equipment used in the normal course of business. The
following table shows the future minimum obligations under lease
commitments in effect at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
1997 $ 900 $ 48,200
1998 900 41,700
1999 400 31,100
2000 400 24,800
2001 400 18,500
Thereafter 10,200 27,900
----------- ---------
13,200 (a) 192,200
Less: sublease commitments - 400
----------- ---------
$13,200 $191,800
=========== =========
<FN>
(a) Includes $9.7 million of imputed interest.
</TABLE>
Rental expense under operating leases amounted to $58.1 million, $58.3
million and $48.6 million for 1996, 1995 and 1994, respectively, net of
sublease income of $0.5 million in 1996 and $0.7 million in both 1995 and
1994.
Commitments
- -----------
In the normal course of business, the Company enters into contractual
arrangements to obtain and protect the Company's right to create and market
certain toys and for future purchases of goods and services to ensure
availability and timely delivery. Such arrangements include royalty
payments pursuant to licensing agreements and commitments for future
inventory purchases. Certain of these commitments routinely contain
provisions for guaranteed or minimum expenditures during the terms of the
contracts. Current and future commitments for guaranteed payments reflect
the Company's focus on expanding its product lines through alliances with
businesses in other industries, such as television and motion picture
entertainment companies.
The single largest commitment involves the Company's 1991 agreement
with The Walt Disney Company ("Disney"). This licensing agreement, which
contains annual minimum royalty guarantees, permits the Company to use the
Disney name and certain characters on preschool and infant products through
September 2002. In related agreements, the Company participates in
attractions and toy stores at three Disney theme parks under agreements in
effect through June 2002. Under these agreements, the Company makes semi-
annual payments to Disney.
In June 1996, the Company entered into a licensing agreement with
Disney Enterprises, Inc. for an expanded strategic alliance, which grants
the Company exclusive worldwide rights (with certain exceptions) to produce
toys based on all children-oriented Disney television and film properties
introduced, commencing summer 1997. The agreement spans three years, with
the Company having the right for up to two additional years to market
merchandise from film properties produced during the second and third
years. The initial term of the agreement may be renewed for an additional
three-year period upon mutual consent. This agreement contains minimum
royalty guarantees that are contingent upon the number and nature of the
properties introduced by Disney. Commitments for 1997 introductions are
expected to approximate $14.5 million payable over a three-year period.
Future commitments could be as high as $37.8 million per introduction year.
Pursuant to the agreement, the Company issued Disney a stock warrant,
valued at $26.4 million, to purchase 3.0 million shares of the Company's
common stock.
Licensing and related agreements provide for terms extending from 1997
through 2002 and contain provisions for future minimum payments as shown in
the following table (in thousands):
<TABLE>
<CAPTION>
Minimum
Payments
---------
<S> <C>
1997 $ 63,000
1998 75,000
1999 70,000
2000 58,000
2001 59,000
2002 35,000
---------
$360,000
=========
</TABLE>
Royalty expense for the years ended December 31, 1996, 1995 and 1994
was $155.3 million, $137.4 million and $117.0 million, respectively.
As of December 31, 1996, the Company had outstanding commitments for
1997 purchases of inventory of approximately $88 million. As of December
31, 1995, the Company had commitments for 1996 purchases of inventory of
approximately $109 million.
Foreign Currency Contracts
- --------------------------
The Company enters into foreign currency forward exchange contracts and
swap agreements primarily as hedges of inventory purchases, sales and other
intercompany transactions denominated in foreign currencies, to limit the
effect of exchange rate fluctuations on the results of operations and cash
flows. These contracts generally have maturity dates of up to 18 months.
Gains or losses related to hedged transactions, which qualify for hedge
accounting, are deferred and are recognized in the results of operations as
part of the underlying transaction. Contracts that do not qualify for
hedge accounting are marked to market with gains and losses recognized in
the results of operations currently. Had the Company not entered into
hedges covering a percentage of its foreign currency positions, the
unfavorable effect on 1996 pre-tax income would have approximated $15
million.
As of December 31, 1996 and 1995, the Company held the following
contracts to obtain US dollars (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Notional Notional
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Forwards $401,513 $524,351
Swaps 98,678 135,477
---------- ----------
$500,191 $490,000 $659,828 $663,000
========== ========== ========== ==========
</TABLE>
Fair value reflects the amount, based on dealer quotes, the Company
would receive at maturity for contracts involving the same currencies and
maturity dates, if they had been entered into as of year-end 1996 and 1995,
respectively.
As of December 31, 1996 and 1995, the Company held the following
contracts to purchase foreign currencies (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Notional Notional
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Forwards $ 71,732 $198,006
Swaps 94,194 59,899
---------- ----------
$165,926 $166,000 $257,905 $257,000
========== ========== ========== ==========
</TABLE>
Fair value reflects the amount, based on dealer quotes, the Company
would pay at maturity for contracts involving the same currencies and
maturity dates, if they had been entered into as of year-end 1996 and 1995,
respectively.
The following table summarizes the Company's foreign currency
contracts by major currency as of December 31, 1996 and 1995 (in thousands
of US dollars):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Buy Sell Buy Sell
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
US dollars $500,191 $161,965 $659,828 $227,944
German deutsche marks 44,735 103,574 33,424 157,738
Italian lira 8,324 59,265 - 54,481
Malaysian ringgits 56,475 - 78,071 -
Hong Kong dollars - 13,429 72,274 5,160
French francs 429 63,852 - 117,150
British pounds sterling 26,501 50,319 - 78,092
Canadian dollars 11,002 40,204 21,127 45,541
Spanish pesetas - 23,171 - 30,271
Dutch guilders - 74,864 22,379 68,468
Japanese yen - 7,913 - 51,534
Australian dollars - 28,187 - 28,904
Belgian francs - 29,810 - 19,839
Swiss francs 11,955 - 12,930 8,232
Taiwan dollars 2,972 - 17,700 -
Swedish krona - - - 6,675
Danish krone - - - 9,825
Other (under $5,000) 3,533 9,564 - 7,879
---------- ---------- ---------- ----------
$666,117 $666,117 $917,733 $917,733
========== ========== ========== ==========
</TABLE>
In addition to the forward exchange contracts discussed above, Tyco
had an option to purchase $5.5 million US dollars with Mexican pesos as of
December 31, 1996, which was settled in February 1997.
In order to minimize the risk of counterparty non-performance, the
Company executes its foreign currency forward exchange contracts and swap
agreements with financial institutions believed to be credit-worthy,
generally those that provide the Company with its working capital lines of
credit. The Company does not trade in financial instruments nor does it
enter into contracts for speculative purposes.
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 by retaining flexibility with respect to currencies used for
international borrowings and intercompany invoicing. By policy, the
Company maintains hedge coverages between minimum and maximum percentages
of its anticipated foreign currency exposures for any given year.
Litigation
- ----------
The Company is involved in various litigation and other legal matters,
including claims related to intellectual property, product liability, labor
and environmental cleanup, which are being addressed or defended in the
ordinary course of business. Management believes that any liability which
may potentially result upon resolution of such matters will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
NOTE 7 - NONRECURRING ITEMS AND ACQUISITIONS
- --------------------------------------------
Special Charge
- --------------
During 1996, the Company received comments from the Securities and Exchange
Commission regarding its accounting for certain royalties and participation
fees in prior periods. In response to these comments, in the fourth
quarter of 1996, the Company charged $14.2 million of royalty expense to
cost of sales, of which $11.8 million related to 1994 and $2.0 million
related to 1995, and charged $7.6 million of participation fees to
advertising expense, of which $3.6 million related to 1994 and $4.0 million
related to 1995. This charge reduced fourth quarter net income by $15.1
million or $0.05 per share. The Company continues to believe that its
original accounting treatment was appropriate.
Restructuring Charges
- ---------------------
In the 1994 fourth quarter, Mattel recognized a $72.0 million pre-tax
charge against continuing operations in connection with the consolidation
of manufacturing operations and the reduction of headquarters expense and
support functions worldwide. After related tax effects, the net $46.8
million charge impacted 1994 earnings by $0.16 per share.
During 1995, Tyco adopted restructuring programs to reduce operating
expenses in Europe and at the Tyco Preschool unit which resulted in a pre-
tax charge against continuing operations of $8.9 million. During 1994,
Tyco recorded a $4.7 million pre-tax charge related to additional costs to
close its Italian subsidiary.
As of December 31, 1996, the restructuring activity provided for by
these charges was substantially complete and amounts previously accrued had
been paid. The type and amount of charges incurred to date approximated
the amounts included in these provisions.
Acquisitions
- ------------
During 1994, the Company acquired the entities described below, which were
accounted for by the purchase method of accounting. The results of
operations of the acquired companies have been included in the accompanying
consolidated financial statements from their respective dates of
acquisition.
In May 1994, the Company acquired substantially all of the business
assets and assumed the associated debts and liabilities of Kransco, a San
Francisco-based designer, manufacturer and marketer of brand name
recreational and sporting products for $274.6 million in cash, including
costs directly related to the acquisition and the repayment of $20.0
million of Kransco's short-term borrowings. The asset purchase agreement
also provided for future contingent consideration in the event that net
sales of the POWER WHEELS product line reached or exceeded certain levels
in each of calendar years 1994, 1995 and 1996. Under the agreement, the
contingent consideration payable with respect to any year shall not exceed
$8.6 million. During 1996 and 1995, $17.2 million was paid relating to the
1995 and 1994 sales, and an additional $8.6 million was accrued in 1996,
resulting in an increase to the initial goodwill. The excess of the
aggregate purchase price over the estimated fair market value of the net
assets acquired was approximately $238 million, which is being amortized on
a straight-line basis over 20 years.
In July 1994, the Company acquired a majority of the shares of Spear,
a company organized in the United Kingdom, that holds the rights to
SCRABBLE in markets outside of the United States and Canada, and certain
other games worldwide. The aggregate purchase price, including related
acquisition costs, denominated in pounds sterling, was approximately $100
million. The excess of cost over the estimated fair market value of the
net assets acquired was approximately $100 million, which is being
amortized on a straight-line basis over 20 years.
NOTE 8 - FINANCIAL INFORMATION BY GEOGRAPHIC AREA
- -------------------------------------------------
The Company's business consists of the design, manufacture and marketing of
toys on a worldwide basis. The Company's international operations are
located principally in Europe, Canada, Latin America and Asia.
The Company's toy products are sold throughout the world. Credit is
granted to customers on an unsecured basis, and generally provides for
extended payment terms which result in a substantial portion of trade
receivables being collected during the latter half of the year. In the
United States, toys are distributed directly to large retailers, including
discount and free-standing toy stores, chain stores, department stores,
other retail outlets, and to a limited extent, wholesalers.
Internationally, the Company sells its products directly in most of the
European and Asian countries. The Company's products are marketed principally
through distributors in certain Latin American countries, and the Company
also licenses some of its products to outside manufacturers for sale in
Peru and other Latin American countries.
Customers accounting for more than 10% of the Company's consolidated
net sales and related accounts receivable are as follows (dollars in
millions):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Worldwide sales for the year ended
- ----------------------------------
Toys R Us 23% 23% 24%
Wal-Mart 12% 12% 12%
Accounts receivable as of December 31
- -------------------------------------
Toys R Us $185.0 $157.6 $197.9
Wal-Mart 90.4 78.1 124.9
- -------------------------------------------------------------------------
</TABLE>
Tyco owns an 18.5% interest in Taiyo Kogyo Co., Ltd. ("Taiyo"), a
significant manufacturer of its radio control vehicle product line. For
the years ended December 31, 1996, 1995 and 1994, Tyco's purchases from
Taiyo aggregated $69.1 million, $58.2 million and $63.9 million, respectively.
Information by geographic area is set forth in the tables below.
Profit from operations represents income before income taxes, interest
expense and general corporate expenses. Intercompany sales are based upon
transfer prices which include manufacturing cost and profit.
<TABLE>
<CAPTION>
Profit From Identifiable
(In thousands) Net Sales Operations Assets
- -------------- ----------- ------------ ------------
<S> <C> <C> <C>
1996
United States $3,099,604 $ 367,219 $1,838,912
Europe and Canada 1,361,188 184,387 764,899
Asia and Latin America 1,785,167 205,889 666,633
----------- ------------ -----------
6,245,959 757,495 3,270,444
Intercompany sales
United States (403,796) - -
Europe and Canada (135,232) - -
Asia and Latin America (1,171,599) - -
Interest expense - (100,226) -
Corporate and other - (120,513) 310,698
----------- ------------ -----------
Consolidated total $4,535,332 $ 536,756 $3,581,142
=========== ============ ===========
1995
United States $3,024,083 $350,894 $1,577,185
Europe and Canada 1,407,628 210,476 832,392
Asia and Latin America 1,553,865 142,452 570,191
----------- ------------ -----------
5,985,576 703,822 2,979,768
Intercompany sales
United States (464,343) - -
Europe and Canada (124,356) - -
Asia and Latin America (1,027,061) - -
Interest expense - (102,983) -
Corporate and other - (96,171) 361,602
----------- ------------ -----------
Consolidated total $4,369,816 $504,668 $3,341,370
=========== ============ ===========
1994
United States $2,750,639 $297,574 $1,540,675
Europe and Canada 1,372,014 174,201 863,022
Asia and Latin America 1,449,213 112,855 545,495
----------- ------------ -----------
5,571,866 584,630 2,949,192
Intercompany sales
United States (490,432) - -
Europe and Canada (154,913) - -
Asia and Latin America (955,295) - -
Interest expense - (87,071) -
Corporate and other - (135,402) 201,246
----------- ------------ -----------
Consolidated total $3,971,226 $362,157 $3,150,438
=========== ============ ===========
</TABLE>
fifty seven
NOTE 9 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except per share First Second Third Fourth
amounts) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996 (a)
Net sales $683,999 $921,583 $1,497,916 $1,431,834
Gross profit (b) 322,874 436,024 750,773 710,087
Advertising and promotion expenses (c) 100,104 129,524 240,303 308,988
Other selling and administrative
expenses 169,581 183,216 204,584 214,954
Other expense, net 4,499 8,704 9,459 8,860
Operating profit (d) (e) 48,690 114,580 296,427 177,285
Income before taxes 28,797 92,590 268,176 147,193
Net income 20,534 63,370 181,375 106,945
Preferred stock dividend requirments (827) (889) (2,838) (2,837)
Net income applicable to common
shares 19,707 62,481 178,537 104,108
Income per share (f):
Net income $ 0.07 $ 0.21 $ 0.61 $ 0.36
Average number of common and
common equivalent shares 298,858 297,916 293,961 292,319
Dividends declared per common
share (f) $ 0.060 $ 0.060 $ 0.060 $ 0.060
Common stock market price (f):
High $ 28.30 $ 28.88 $ 29.13 $ 31.50
Low 23.90 24.38 22.13 24.63
YEAR ENDED DECEMBER 31, 1995 (a)
Net sales $662,350 $919,013 $1,410,299 $1,378,154
Gross profit 303,684 426,136 675,594 662,326
Advertising and promotion expenses 102,027 137,776 224,958 266,985
Other selling and administrative
expenses 160,314 170,725 189,907 200,416
Other (income) expense, net (g) (6,567) 652 (7,187) 11,183
Operating profit (e) 47,910 112,083 267,916 179,742
Income before taxes 30,551 87,651 236,570 149,896
Net income 22,118 60,490 158,701 96,580
Preferred and preference stock
dividend requirements (1,883) (1,889) (1,907) (863)
Net income applicable to common
shares 20,235 58,601 156,794 95,717
Income per share (f):
Net income $ 0.07 $ 0.20 $ 0.52 $ 0.32
Average number of common and
common equivalent shares 296,841 297,681 298,914 297,939
Dividends declared per common
share (f) $ 0.048 $ 0.048 $ 0.048 $ 0.048
Common stock market price (f):
High $ 19.80 $ 22.20 $ 24.50 $ 24.90
Low 15.76 18.20 20.30 21.20
- ---------------------------------------------------------------------------------
<FN>
(a) Financial information for all quarters reflects the retroactive effect
of the March 1997 merger, accounted for as a pooling of interests,
with Tyco.
(b) Fourth quarter gross profit was reduced by a $14.2 million nonrecurring
charge related to the accounting for certain royalties in prior periods,
$2.0 million of which relates to 1995.
(c) Fourth quarter advertising and promotion expenses include a $7.6 million
nonrecurring charge related to the accounting for participation fees in
prior periods, $4.0 million of which relates to the fourth quarter of 1995.
(d) Fourth quarter operating profit includes a $21.8 million nonrecurring
charge related to the accounting for certain royalties and participation
fees in prior periods.
(e) Represents income from operations before interest expense, provision for
income taxes and in 1995, restructuring and integration charges.
(f) Per share data and market prices for all periods reflect the retroactive
effect of stock splits distributed to shareholders in March 1996 and
January 1995.
(g) Third quarter other (income) expense, net includes a $9.1 million gain
from the sale of the non-toy business and worldwide trademark rights
related to Corgi.
</TABLE>
NOTE 10 - SUPPLEMENTAL FINANCIAL INFORMATION
- --------------------------------------------
<TABLE>
<CAPTION>
As of Year End
----------------------
(In thousands) 1996 1995
- ------------------------------------------ ---------- ----------
<S> <C> <C>
INVENTORIES INCLUDE THE FOLLOWING:
Raw materials and work in process $ 70,121 $ 67,161
Finished goods 374,057 340,390
---------- ----------
$444,178 $407,551
========== ==========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
INCLUDE THE FOLLOWING:
Deferred income taxes $101,075 $101,038
Other 94,598 108,946
---------- ----------
$195,673 $209,984
========== ==========
INTANGIBLE ASSETS, NET, INCLUDE THE
FOLLOWING:
Goodwill $600,851 $621,113
Other 10,559 13,338
---------- ----------
$611,410 $634,451
========== ==========
ACCRUED LIABILITIES INCLUDE THE
FOLLOWING:
Advertising and promotion $131,242 $119,964
Royalties 63,558 45,482
Defective returns 57,176 35,309
Compensation 52,919 89,822
Other 205,796 213,598
---------- ----------
$510,691 $504,175
========== ==========
<CAPTION>
For the Year
-------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------ --------- ---------- ----------
<S> <C> <C> <C>
SELLING AND ADMINISTRATIVE EXPENSES
INCLUDE THE FOLLOWING:
Research and development $147,174 $132,020 $110,672
- -------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Income taxes $107,944 $169,923 $69,113
Interest 99,019 100,544 83,800
Noncash investing and financing
activities:
Issuance of stock warrant 26,444 - -
Conversion of 8% Debentures - - 75,662
- -------------------------------------------------------------------------
NOTE 11 - SUBSEQUENT EVENTS
- ---------------------------
Business Combination
- --------------------
Pursuant to an Agreement and Plan of Merger dated November 17, 1996, as
amended by an Amendment to Agreement and Plan of Merger dated November 22,
1996, a merger was consummated between the Company and Tyco on March 27,
1997. The stock-for-stock transaction was approved by the shareholders of
Tyco, after which Tyco was merged with and into Mattel, with Mattel
continuing as the surviving corporation in the merger. As a result of the
merger, the separate existence of Tyco ceased. Under the merger agreement,
each outstanding share of Tyco common stock was converted into the right to
receive 0.48876 Mattel common shares and resulted in the issuance of
approximately 17 million shares. Tyco restricted stock units and stock
options outstanding as of the merger date were exchanged for approximately
0.6 million Mattel common shares. In addition, each share of Tyco Series B
and Series C Preferred Stock was converted into like Mattel preferred
stock. 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 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 consolidated statements of income for the three years ended December
31, 1996 is as follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
For the Year
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales
Mattel $3,785,958 $3,638,812 $3,205,025
Tyco (a) 749,374 731,004 766,201
---------- ---------- ----------
Combined $4,535,332 $4,369,816 $3,971,226
========== ========== ==========
Net income
Mattel $ 377,641 $ 357,802 $ 255,832
Tyco (b) (5,417) (19,913) (31,162)
---------- ---------- ----------
Combined $ 372,224 $ 337,889 $ 224,670
========== ========== ==========
<FN>
(a) Certain amounts for all years presented have been classified differently
than previously published amounts in order to conform the accounting
presentation of the two entities.
(b) The provision for income taxes has been adjusted by $3.4 million, $7.3
million and $1.8 million in 1996, 1995, and 1994, respectively, to
reflect the adjustment of valuation allowances established in the
historical financial statements of Tyco, resulting in the recognition of
benefits of losses incurred by certain foreign affiliates.
</TABLE>
Integration and Restructuring Charge
- ------------------------------------
The Company recognized a $275.0 million pre-tax charge against continuing
operations in March 1997 in connection with the Tyco integration and Mattel
restructuring. Of these charges, approximately $43 million represented
transaction costs, including: investment banking, legal, accounting, and
contractual termination and incentive benefits; and approximately $82
million related to severance costs from the elimination of approximately
2,700 positions worldwide from the combined company. The remaining $150
million estimated for integration and restructuring costs includes the
following: i) approximately $49 million primarily for the writedown of
fixed assets and lease termination costs in connection with the
consolidation of manufacturing facilities; ii) approximately $71 million
primarily for lease and contract terminations and asset writedowns
resulting from the elimination of duplicate marketing offices,
administrative functions and distribution facilities; and iii)
approximately $30 million in charges primarily for writeoff of tooling and
other costs related to the abandonment of certain product lines. Of the
total pre-tax charge, approximately $85 million represents noncash asset
writedowns. It is anticipated that substantially all actions related to
the integration and restructuring activity will be taken within one year.
Issuance of MT Notes
- --------------------
In February 1996, the Company filed a universal shelf registration
statement allowing the issuance of up to $350.0 million of debt and equity
securities. This registration statement was amended in May 1997 to allow
the issuance of an additional $39.5 million of debt and equity securities.
Through July 18, 1997, the Company issued an aggregate of $230.0 million
principal amount of Series B MT Notes maturing on various dates from July
2007 to July 2012. Interest is payable semiannually at fixed rates ranging
from 6.72% to 7.49% per annum on the fifteenth day of May and November. In
addition, the Company issued 3.0 million common shares valued at $72.8 million
in March 1997.
10-1/8% Notes Notice of Redemption
- ----------------------------------
On July 10, 1997, the Company issued its Notice of Redemption to holders of
the 10-1/8% Notes. The redemption price is 103.797% of the principal
amount, payable in cash together with interest accrued to August 15, 1997,
the final interest payment date. The Company expects to recognize an
extraordinary loss of approximately $5 million, net of tax, as a result of
the redemption.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
MATTEL, INC.
Registrant
By: /s/ KEVIN M. FARR
-------------------------
Kevin M. Farr
Date: July 30, 1997 Senior Vice President and
------------- Controller
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in each of the nine
Registration Statements on Form S-8 (No. 33-54391, No. 33-52723, No. 33-
14717, No. 33-51454, No. 33-34920, No. 33-57082, No. 33-62185, No. 333-
01061 and No. 333-03385) and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 333-01307) of Mattel, Inc. and its
subsidiaries of our report dated February 5, 1997 (July 18, 1997 with
respect to the merger with Tyco Toys, Inc. and other subsequent events
described in Note 11) which appears in this Current Report on Form 8-K.
/s/ PRICE WATERHOUSE LLP
- ------------------------
Los Angeles, California
July 28, 1997
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the incorporation by reference in each of the nine
Registration Statements on Form S-8 (No. 33-54391, No. 33-52723, No. 33-
14717, No. 33-51454, No. 33-34920, No. 33-57082, No. 33-62185, No. 333-
01061 and No. 333-03385) and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 333-01307) of Mattel, Inc.
of our report dated February 4, 1997 (except for note 15, as to which the
date is March 27, 1997) on the consolidated financial statements of Tyco
Toys, Inc. and subsidiaries which appears in this Current Report on
Form 8-K.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Philadelphia, Pennsylvania
July 28, 1997
<PAGE>
