<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
-----------
MATTEL, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
---------------------------
(Former name, former address and former fiscal year,
if changed since last report) None
-----------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of registrant's common stock as of May 12, 1999:
Common Stock - $1 par value - 286,277,137 shares
<PAGE>
The undersigned registrant hereby amends and restates in its entirety, and
as set forth herein, its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999, previously filed with the Securities and Exchange Commission on
May 17, 1999. Specifically, Part I, Item 1 of the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 has been amended, as set forth below, in
order to conform the operating segment disclosure presented in Note 11 to the
Notes to Consolidated Financial Information to the requirements of Statement of
Financial Accounting Standards No. 131. A reference to the registrant's segment
disclosure was also added to Management's Discussion and Analysis of Financial
Condition and Results of Operations as set forth therein.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, March 31, Dec. 31,
(In thousands) 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------
Assets
Current Assets
<S> <C> <C> <C>
Cash $ 50,215 $ 331,884 $ 212,454
Accounts receivable, net 880,360 987,906 983,050
Inventories 567,658 531,623 584,358
Prepaid expenses and other current assets 290,673 251,397 277,948
- --------------------------------------------------------------------------------------------------------------------
Total current assets 1,788,906 2,102,810 2,057,810
- --------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 34,763 28,730 35,113
Buildings 268,909 201,400 271,580
Machinery and equipment 521,478 459,892 512,225
Capitalized leases 21,406 24,485 23,271
Leasehold improvements 86,679 73,301 82,643
- --------------------------------------------------------------------------------------------------------------------
933,235 787,808 924,832
Less: accumulated depreciation 387,039 350,415 375,724
- --------------------------------------------------------------------------------------------------------------------
546,196 437,393 549,108
Tools, dies and molds, net 187,339 165,400 187,349
- --------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 733,535 602,793 736,457
- --------------------------------------------------------------------------------------------------------------------
Other Noncurrent Assets
Intangibles, net 1,242,380 548,957 1,264,462
Other assets 212,513 189,234 203,436
- --------------------------------------------------------------------------------------------------------------------
$3,977,334 $3,443,794 $4,262,165
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
March 31, March 31, Dec. 31,
(In thousands, except share data) 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Short-term borrowings $ 259,435 $ 18,204 $ 134,006
Current portion of long-term liabilities 33,401 13,577 33,518
Accounts payable 200,490 193,431 293,421
Accrued liabilities 419,895 443,253 651,013
Income taxes payable 175,535 134,284 205,253
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,088,756 802,749 1,317,211
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Senior notes 400,000 100,000 400,000
Medium-term notes 540,500 520,500 540,500
Mortgage note 42,856 43,437 43,007
Other 148,953 136,862 141,249
- ----------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,132,309 800,799 1,124,756
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, Series C $1.00 par value, $125.00
liquidation preference per share, 0.8 million shares
authorized, issued and outstanding 772 772 772
Common stock $1.00 par value, 1.0 billion shares
authorized; 300.4 million shares issued 300,381 300,381 300,381
Additional paid-in capital 482,131 489,323 482,662
Treasury stock at cost; 14.2 million shares, 6.2 million
shares, and 8.8 million shares, respectively (494,007) (207,695) (495,347)
Retained earnings 1,681,937 1,480,866 1,724,677
Accumulated other comprehensive loss (214,945) (223,401) (192,947)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,756,269 1,840,246 1,820,198
- ----------------------------------------------------------------------------------------------------------------------
$3,977,334 $3,443,794 $4,262,165
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Statements Of Operations
<TABLE>
<CAPTION>
For the
Three Months Ended
---------------------------------------
March 31, March 31,
(In thousands, except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $692,116 $705,164
Cost of sales 375,379 381,246
- ----------------------------------------------------------------------------------------------------------
Gross Profit 316,737 323,918
Advertising and promotion expenses 92,051 98,081
Other selling and administrative expenses 209,414 183,791
Amortization of intangibles 13,153 7,713
Interest expense 24,858 16,392
Other expense, net 2,269 185
- ----------------------------------------------------------------------------------------------------------
(Loss) Income Before Income Taxes (25,008) 17,756
(Benefit) provision for income taxes (7,152) 5,087
- ----------------------------------------------------------------------------------------------------------
Net (Loss) Income (17,856) 12,669
Less: preferred stock dividend requirements 1,990 1,990
- ----------------------------------------------------------------------------------------------------------
Net (Loss) Income Applicable to Common Shares $(19,846) $ 10,679
==========================================================================================================
Basic (Loss) Income Per Common Share
Net (loss) income $ (0.07) $ 0.04
==========================================================================================================
Weighted average number of common shares 286,153 293,048
==========================================================================================================
Diluted (Loss) Income Per Common Share
Net (loss) income $ (0.07) $ 0.04
- ----------------------------------------------------------------------------------------------------------
Weighted average number of common and common
equivalent shares 286,153 298,164
==========================================================================================================
Dividends Declared Per Common Share $ 0.08 $ 0.07
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the
Three Months Ended
------------------------------------
March 31, March 31,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income $ (17,856) $ 12,669
Adjustments to reconcile net (loss) income to net cash flows from operating
activities:
Depreciation 45,926 41,760
Amortization 13,582 8,078
Increase (decrease) from changes in net assets and liabilities:
Accounts receivable 76,575 96,439
Inventories 5,253 (105,785)
Prepaid expenses and other current assets (13,789) (5,781)
Accounts payable, accrued liabilities and income taxes payable (332,590) (365,098)
Other, net (7,709) (7,106)
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows used for operating activities (230,608) (324,824)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (27,218) (26,045)
Purchases of other property, plant and equipment (19,000) (38,848)
Proceeds from sale of other property, plant and equipment 3,291 11,379
Payment for acquisition - (11,057)
Other, net (502) (2,695)
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities (43,429) (67,266)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Short-term borrowings, net 135,950 702
Exercise of stock options including related tax benefit 809 90,215
Purchase of treasury stock - (32,339)
Payment of dividends on common and preferred stock (22,952) (24,521)
Other, net (187) (1,122)
- -----------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 113,620 32,935
- -----------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (1,822) (3,908)
- -----------------------------------------------------------------------------------------------------------------------
Decrease in Cash (162,239) (363,063)
Cash at Beginning of Period 212,454 694,947
- -----------------------------------------------------------------------------------------------------------------------
Cash at End of Period $ 50,215 $ 331,884
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Mattel, Inc. and Subsidiaries
Notes To Consolidated Financial Information
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments considered necessary for a fair
presentation of Mattel, Inc. and its subsidiaries' ("Mattel") financial
position and interim results as of and for the periods presented have been
included. Certain amounts in the financial statements for prior periods have
been reclassified to conform with the current period's presentation. Because
Mattel's business is seasonal, results for interim periods are not
necessarily indicative of those which may be expected for a full year.
2. The financial information included herein should be read in conjunction with
Mattel's consolidated financial statements and related notes in its
1998 Annual Report to Stockholders.
3. Accounts receivable are shown net of allowances for doubtful accounts of
$34.5 million (March 31, 1999), $25.2 million (March 31, 1998), and $41.2
million (December 31, 1998).
4. Inventories are comprised of the following:
<TABLE>
<CAPTION>
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and work in progress $ 58,903 $ 57,283 $ 42,851
Finished goods 508,755 474,340 541,507
- --------------------------------------------------------------------------------------------------------------
$567,658 $531,623 $584,358
==============================================================================================================
</TABLE>
5. Intangibles, net include the following:
<TABLE>
<CAPTION>
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill, net $1,231,834 $540,626 $1,253,530
Other 10,546 8,331 10,932
- --------------------------------------------------------------------------------------------------------------
$1,242,380 $548,957 $1,264,462
==============================================================================================================
</TABLE>
6. Senior notes include the following:
<TABLE>
<CAPTION>
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6-3/4% due 2000 $100,000 $100,000 $100,000
6% due 2003 150,000 - 150,000
6-1/8% due 2005 150,000 - 150,000
- --------------------------------------------------------------------------------------------------------------
$400,000 $100,000 $400,000
==============================================================================================================
</TABLE>
6
<PAGE>
7. Comprehensive loss was $39.9 million at March 31, 1999 and $17.1 million at
March 31, 1998. Comprehensive income was $333.0 at December 31, 1998.
Comprehensive (loss) income is comprised of net (loss) income and currency
translation adjustments.
8. Net cash flows from operating activities include cash payments for the
following:
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------------------
(In thousands) March 31, 1999 March 31, 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Interest $19,509 $ 6,499
Income taxes 18,311 45,686
- ------------------------------------------------------------------------------------------
</TABLE>
9. In the current quarter, the board of directors declared cash dividends of
$0.08 per common share, compared to $0.07 per common share in the first
quarter 1998.
10. Basic (loss) income per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares outstanding during each period. Earnings available to common
stockholders represent reported net (loss) income less preferred stock
dividend requirements.
Diluted (loss) income per common share is computed by dividing diluted
earnings available to common stockholders by the weighted average number of
common and common equivalent shares outstanding during each period. The
calculation of common equivalent shares assumes the exercise of dilutive
stock options and warrants, net of assumed treasury share repurchases at
average market prices, and conversion of dilutive preferred stock, as
applicable. Diluted earnings available to common stockholders represent
earnings available to common stockholders plus preferred stock dividend
requirements. Diluted earnings per share presented for the 1999 first
quarter is the same as basic earnings per share due to Mattel's net loss
position. Premium price stock options totaling 17.7 million and preferred
stock were excluded from the calculation of diluted earnings per share in
the 1998 first quarter because they were anti-dilutive.
7
<PAGE>
11. In the 1998 fourth quarter, Mattel adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
-------------------------------------------
and Related Information. This statement supersedes Statement of Financial
-----------------------
Accounting Standards No. 14, Financial Reporting for Segments of a Business
----------------------------------------------
Enterprise, replacing the "industry segment" approach with the "management"
----------
approach. The management approach designates the internal organization that
is used by management for making operating decisions and assessing
performance as the source of Mattel's reportable segments. This statement
requires disclosure of certain information by reportable segment,
geographic area and major customer.
In order to conform to the requirements of SFAS No. 131, the operating
segment disclosures have been restated as follows:
The table below presents information about segment revenues, operating
profit and assets. Mattel's reportable segments are separately managed
business units and include marketing and manufacturing. The marketing
segment is divided on a geographic basis between domestic and
international. The domestic segment is further divided into USA Toys,
Fisher-Price/Tyco Preschool and Other. USA Toys principally sells products
in the Girls, Entertainment and Wheels categories, while Fisher-Price/Tyco
Preschool sells principally Infant and Preschool products. The Other
segment is principally involved in selling specialty products in the Girls
category. The international segment sells products in all product
categories. Operations, Mattel's manufacturing segment, manufactures toy
products, which are sold to the marketing segments based on intercompany
transfer prices. Such prices are based on manufacturing costs plus a profit
margin. Segment revenues do not include sales adjustments such as trade
discounts and other allowances. However, such adjustments are included in
the determination of segment profit from operations. Segment profit from
operations represents income before restructuring and other charges,
interest expense, and provision for income taxes. The consolidated total
profit from operations presented in the following tables represents income
before income taxes as reported in the consolidated statements of
operations. The segment assets are comprised of accounts receivable and
inventories, net of applicable reserves and allowances.
8
<PAGE>
<TABLE>
<CAPTION>
Revenues
From Profit/(Loss)
External Intersegment From Segment
(In thousands) Customers Revenues Operations Assets
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, 1999
Marketing
Domestic:
USA Toys $319,241 $ - $ 18,937 $ 561,396
Fisher-Price/Tyco Preschool 140,323 - (350) 255,357
Other segments 44,383 - (6,710) 75,525
International 237,636 - (13,930) 503,576
Operations 190,183 21,658 79,006
-------- --------- -------- ----------
Segment total 741,583 190,183 19,605 1,474,860
Elimination of intersegment sales - (190,183) - -
Sales adjustments (49,467) - - -
Interest expense - - (24,858) -
Corporate and other - - (19,755) (26,842)
-------- --------- -------- ----------
Consolidated total $692,116 $ - $(25,008) $1,448,018
======== ========= ======== ==========
MARCH 31, 1998
Marketing
Domestic:
USA Toys $331,579 $ - $ 43,651 $ 651,052
Fisher-Price/Tyco Preschool 183,270 - 11,483 308,228
International 235,619 - (7,529) 511,678
Operations 992 293,109 24,619 73,912
-------- --------- -------- ----------
Segment total 751,460 293,109 72,224 1,544,870
Elimination of intersegment sales - (293,109) - -
Sales adjustments (46,296) - - -
Interest expense - - (16,392) -
Corporate and other - - (38,076) (25,355)
-------- --------- -------- ----------
Consolidated total $705,164 $ - $ 17,756 $1,519,515
======== ========= ======== ==========
</TABLE>
The marketing segments sell a broad variety of children's toy products, which
are grouped into four major categories: Girls, Infant and Preschool,
Entertainment and Wheels. The table below presents revenues from external
customers by category:
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------------
(In thousands) March 31, 1999 March 31, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Girls $315,239 $276,394
Infant and Preschool 237,832 307,043
Wheels 118,128 93,370
Entertainment 63,571 58,735
Other 6,813 15,918
------------------------------------
741,583 751,460
Sales adjustments (49,467) (46,296)
------------------------------------
Consolidated total $692,116 $705,164
====================================
</TABLE>
9
<PAGE>
Mattel, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary Statement
- --------------------
Certain expectations and projections regarding the future performance of Mattel,
Inc. and its subsidiaries ("Mattel") discussed in this quarterly report are
forward-looking and are made under the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These expectations and projections are
based on currently available competitive, financial, and economic data along
with Mattel's operating plans and are subject to certain future events and
uncertainties. Forward-looking statements can be identified by the use of
forward-looking terminology, such as may, will, should, expect, anticipate,
estimate, continue, plans, intends or other similar terminology. Management
cautions you that the following factors, among others, could cause Mattel's
actual consolidated results of operations and financial position in 1999 and
thereafter to differ significantly from those expressed in forward-looking
statements:
Marketplace Risks
- - Increased competitive pressure, both domestically and internationally, which
may affect the sales of Mattel's products
- - Significant changes in the buying patterns of major customers, such as the
recent shift by some retailers to just-in-time inventory management, which
may limit Mattel's ability to accurately forecast reorders or cause a
decrease in sales after related expenses have already been incurred
- - Dependence on the timely development, introduction and customer acceptance of
new products, which may affect Mattel's ability to successfully redesign,
restyle and extend existing core products and product lines and successfully
bring new products to market
- - Possible weaknesses in economic conditions, both domestically and
internationally, which may affect the sales of Mattel's products and the
costs associated with manufacturing and distributing these products
Financial Considerations
- - Currency fluctuations, which may affect Mattel's reportable income
- - Significant changes in interest rates, both domestically and internationally,
which may affect Mattel's cost of financing both its operations and
investments
Merger-Related Risks
- - Difficulty integrating the operations of The Learning Company, Inc.
("Learning Company") into Mattel following the May 1999 merger, which may
impede Mattel's ability to achieve savings or operating synergies from the
merger
10
<PAGE>
Year 2000 Compliance
- - Potential inability of computer systems or software products used by Mattel
and/or its customers and suppliers to properly recognize and process date-
sensitive information beyond January 1, 2000, which may result in an
interruption in normal business operations of Mattel, its suppliers and
customers
Other Risks
- - Inability to achieve cost savings expected as part of restructuring
activities, which may result in higher than expected costs following such
restructurings
- - Development of new technologies, including the Internet, which may create new
risks to Mattel's ability to protect its intellectual property rights
- - Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products, environmental activities or
trade restrictions, which may lead to increased costs or interruption in
normal business operations of Mattel
- - Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal business
operations of Mattel
- - Other factors that may be described from time to time in Mattel's filings
with the Securities and Exchange Commission
Summary
- -------
Mattel designs, manufactures, and markets a broad variety of children's products
on a worldwide basis through both sales to retailers and direct to consumers.
Mattel's business is dependent in great part on its ability each year to
redesign, restyle and extend existing core products and product lines, to design
and develop innovative new products and product lines and to expand its
marketing capability.
Mattel plans to continue to focus on its portfolio of brands that have
fundamental play patterns and have historically had worldwide appeal, have been
sustainable, and have delivered consistent profitability. Mattel's portfolio of
brands can be grouped in the following four categories:
Girls/Barbie - including Barbie(R) fashion dolls and accessories, collector
dolls, Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R), and Polly
Pocket(R)
Infant and Preschool - including Fisher-Price(R), Disney preschool and plush,
Power Wheels(R), Sesame Street(R), See `N Say(R), Magna Doodle(R), View-
Master(R), and Blue's Clues(R)
Boys - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and
Tyco(R) Radio Control
Entertainment - including Disney, Nickelodeon(R), games, and puzzles
Media - including Mattel Media and "Intel Play" branded technology toys
11
<PAGE>
Segment Information
- -------------------
Mattel's reportable segments are separately managed business units and include
marketing and manufacturing. The marketing segment is divided on a geographic
basis between domestic and international. The domestic segment is further
divided into USA Toys, Fisher-Price/Tyco Preschool and Other. USA Toys
principally sells products in the Girls, Entertainment and Wheels categories,
while Fisher-Price/Tyco Preschool sells principally Infant and Preschool
products. The Other segment is principally involved in selling specialty
products in the Girls category. The international segment sells products in all
categories. Operations, Mattel's manufacturing segment, manufactures toy
products, which are sold to the marketing segments. Financial information
regarding Mattel's segments can be found in Note 11 to the consolidated
financial information.
Results of Operations
- ---------------------
Mattel's business is seasonal, and, therefore, results of operations are
comparable only with corresponding periods. The following is a percentage
analysis of operating results:
<TABLE>
<CAPTION>
For the
Three Months Ended
------------------------------
March 31, March 31,
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100% 100%
===========================================================================================
Gross profit 45.8% 45.9%
Advertising and promotion expenses 13.3 13.9
Other selling and administrative expenses 30.3 26.1
Amortization of intangibles 1.9 1.1
Other expense, net 0.3 -
- -------------------------------------------------------------------------------------------
Operating (loss) profit - 4.8
Interest expense 3.6 2.3
- -------------------------------------------------------------------------------------------
(Loss) income before income taxes (3.6%) 2.5%
===========================================================================================
</TABLE>
Net loss for the first quarter of 1999 was $17.9 million or $0.07 per share as
compared to net income of $12.7 million or $0.04 per share in the first quarter
of 1998. Profitability in the first quarter of 1999 was negatively impacted by
higher goodwill amortization and interest costs related to the 1998 acquisitions
of Pleasant Company and Bluebird Toys PLC ("Bluebird"). Net sales in the first
quarter of 1999 were $692.1 million, a decrease of 2% in both US dollars and
local currencies from $705.2 million in 1998. Sales in the Girls category
increased 14% largely due to $44.4 million in incremental sales of American
Girl(R) resulting from the July 1998 Pleasant Company acquisition. Sales of
Barbie(R) products increased 3% worldwide and 11% domestically. Within the Boys
category, sales of Wheels products increased 27%, demonstrating continued
strength across Hot Wheels(R), Matchbox(R) and Tyco(R) Radio Control. Sales of
Entertainment products, including Disney and Nickelodeon(R), increased 8%. Sales
in the Infant and
12
<PAGE>
Preschool category declined 23%, largely due to last year's success of `Tickle
Me Elmo.' This decrease was partially offset by a 9% increase in sales of core
Fisher-Price products.
Gross sales to customers within the US declined 2% and accounted for 68% of
consolidated sales in the first quarter of 1999 compared to 69% in 1998. Gross
sales to customers outside the US increased 1% from the year ago quarter.
Europe was up 5%, including sales increases of 25% in France and 14% in the
U.K.
Gross profit, as a percentage of net sales, remained strong at 45.8% in first
quarter of 1999 compared to 45.9% in 1998. As a percentage of net sales,
advertising and promotion expenses fell slightly from 13.9% in 1998 to 13.3% in
1999. Other selling and administrative expenses increased from 26.1% to 30.3%.
This increase is being addressed through a business realignment, which we expect
will bring Mattel's overhead costs back in line with 1997 levels. The planned
realignment is expected to include the closure of some of Mattel's facilities
and a workforce reduction affecting over 3,000 positions, or more than 10% of
Mattel's total employment. Amortization of intangibles increased by $5.4
million, mainly due to the amortization of goodwill in connection with the 1998
acquisitions of Pleasant Company and Bluebird.
Interest expense increased $8.5 million primarily due to increased short- and
long-term borrowings to finance Mattel's 1998 acquisitions of Pleasant
Company and Bluebird.
Financial Position
- ------------------
Mattel's cash position as of March 31, 1999 was $50.2 million compared to $331.9
million as of the first quarter 1998. The $281.7 million decline was mainly due
to cash consideration paid in connection with the 1998 acquisitions of Pleasant
Company and Bluebird, partially offset by the issuance of $300.0 million in
senior notes and profitable 1998 operating results. Cash decreased by $162.2
million since December 31, 1998 primarily due to funding of operating
activities. Accounts receivable, net declined by $107.5 million from the year
ago quarter and $102.7 million from year-end, in line with the lower volume.
Inventory balances increased $36.0 million from the 1998 quarter end. On a
comparable basis, excluding Pleasant Company, inventory was down $31.5 million
from the 1998 quarter end. Since year end, inventory decreased $16.7 million as
a result of Mattel managing its production and inventory levels to be more
closely aligned with the just-in-time buying patterns of retailers. Property,
plant and equipment, net grew $130.7 million from the first quarter of 1998
mainly due to assets acquired as part of the acquisition of Pleasant Company and
investments in the expansion of Mattel's manufacturing facilities located in
Mexico. Intangibles increased $693.4 million, compared to the year-ago quarter,
to $1.24 billion due to goodwill generated from the Pleasant Company and
Bluebird acquisitions.
13
<PAGE>
Short-term borrowings increased $241.2 million compared to the 1998 quarter end
due to cash consideration paid in connection with the 1998 acquisitions of
Pleasant Company and Bluebird. Compared to 1998 year end, short-term borrowings
increased $125.4 million to support seasonal needs. Current portion of long-term
liabilities increased $19.8 million over the 1998 quarter end, primarily due to
the reclassification of $30.0 million in medium-term notes payable in 1999 from
long-term debt. Seasonal financing needs for the next twelve months are expected
to be satisfied through internally generated cash, issuance of commercial paper,
issuance of long-term debt, and use of Mattel's various short-term bank lines of
credit.
A summary of Mattel's capitalization is as follows:
<TABLE>
<CAPTION>
(In millions) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medium-term notes $ 540.5 19% $ 520.5 20% $ 540.5 18%
Senior notes 400.0 14 100.0 4 400.0 14
Other long-term debt obligations 42.9 1 54.1 2 43.0 1
- ----------------------------------------------------------------------------------------------
Total long-term debt 983.4 34 674.6 26 983.5 33
Other long-term liabilities 149.0 5 126.2 5 141.3 5
Stockholders' equity 1,756.3 61 1,840.2 69 1,820.2 62
- ----------------------------------------------------------------------------------------------
$2,888.7 100% $2,641.0 100% $2,945.0 100%
==============================================================================================
</TABLE>
Total long-term debt increased as a percentage of total capitalization compared
to the year-ago quarter, mainly due to the issuance of $300.0 million in senior
notes to finance the acquisitions of Pleasant Company and Bluebird. Medium-term
notes increased by $20.0 million due to the issuance of $50.0 million in notes,
partially offset by the reclassification of $30.0 million to current portion of
long-term debt. Mattel expects to satisfy its future long-term capital needs
through the retention of corporate earnings and the issuance of long-term debt
instruments. Stockholders' equity decreased $84.0 million since March 31, 1998,
primarily due to treasury stock purchases and dividend declarations on common
and preferred stock, partially offset by profitable 1998 operating results and
reissuance of treasury stock for the exercise of nonqualified stock options by
Mattel's employees. Stockholder's equity declined $63.9 million from year end
1998 as a result of dividend declarations on common and preferred stock and the
first quarter operating loss.
Business Combination and Related Integration and Restructuring Charge
- ---------------------------------------------------------------------
Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a
merger was consummated between Mattel and Learning Company on May 13, 1999. The
stock-for-stock transaction was approved by the stockholders of both companies,
after which Learning Company was merged with and into Mattel, with Mattel being
the surviving corporation. Under the terms of the merger agreement, each share
of Learning Company Series A Preferred Stock was converted into 20 shares of
Learning Company common stock just prior to the consummation of the merger. Each
outstanding share of
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Learning Company common stock was then converted into the right to receive 1.2
shares of Mattel common stock. As a result, approximately 126 million Mattel
common shares will be issued in exchange for all shares of Learning Company
common stock outstanding as of the merger date. The outstanding share of
Learning Company special voting stock was converted into the right to receive
one share of Mattel Special Voting Preferred Stock. Each outstanding
exchangeable non-voting share of Learning Company's Canadian subsidiary, Softkey
Software Products Inc., remains outstanding, but is now exchangeable into the
right to receive 1.2 shares of Mattel common stock. This transaction has been
accounted for as a pooling of interests, which means that for accounting and
financial reporting purposes, Mattel and Learning Company will treat their
companies as if they had always been combined.
On April 15, 1999, Mattel announced that as a result of the May 1999 merger with
Learning Company and a planned realignment of Mattel's operations to reduce
overhead costs, Mattel expects to incur a pre-tax charge of approximately $300
million to $350 million against results of operations during the second quarter
of 1999. Mattel also announced that the planned realignment was expected to
include the closure of some of Mattel's facilities and a workforce reduction
affecting over 3,000 positions, or more than 10% of Mattel's employees at that
time. The planned realignment will consist of consolidating some manufacturing
and distribution operations, eliminating duplicative facilities, and
terminating various distributor and licensing arrangements. Approximately $75
million of the pre-tax charge is expected to be related to merger transaction
costs, approximately $90 million is expected to be related to merger integration
costs, and approximately $135 million to $185 million is expected to be related
to Mattel restructuring costs. Of the total pre-tax charge, approximately $35
million represents non-cash asset write-downs. Mattel expects to fund this
restructuring through existing cash balances and internally generated cash from
operations. Mattel expects the combined actions to result in cost savings of
approximately $50 million in 1999 and at least $400 million over the following
three years. However, the amount of the expected cost savings are preliminary
estimates and Mattel cannot assure that its actions will result in these cost
savings. Mattel expects the restructuring activities to be substantially
complete by the second quarter of 2000.
New Internet Venture
- --------------------
On April 15, 1999, Mattel announced that it expects to initially spend
approximately $50 million to launch an Internet venture, which is expected to
result in the creation of a new subsidiary later this year, a portion of which
may be offered to the public. Mattel expects that it will be able to offset a
portion of its investment in the Internet venture with the 1999 cost savings
from the realignment discussed above. Mattel's goal is to create a premier
online destination and E-commerce site to better serve children and their
families. Mattel's strategy to reach this goal is premised on attracting
consumers to its sites by bringing together the branded proprietary content of
both Mattel and Learning Company at one "Mattel.com" Web destination.
15
<PAGE>
After merging with Learning Company, Mattel expects to have over 80 websites and
a database of approximately 25 million consumers.
Foreign Currency Risk
- ---------------------
Mattel's results of operations and cash flows can be impacted by exchange rate
fluctuations. To limit the exposure associated with exchange rate movements,
Mattel enters into foreign currency forward exchange contracts primarily to
hedge its purchase of inventory, sales and other intercompany transactions
denominated in foreign currencies. Mattel's results of operations can also be
affected by the translation of foreign revenues and earnings into US dollars.
Market risk exposures exist with respect to the settlement of foreign currency
transactions during the year because currency fluctuations cannot be predicted
with certainty. Mattel seeks to mitigate its exposure to market risk by
monitoring its currency exchange exposure for the year and partially or fully
hedging such exposure. In addition, Mattel manages its exposure through the
selection of currencies used for foreign borrowings and intercompany invoicing.
Mattel does not trade in financial instruments for speculative purposes.
Year 2000 Update
- ----------------
Many currently installed computer systems and software products, including
several used by Mattel, are coded to accept only two-digit (rather than four-
digit) entries in the date code field used to define the applicable year. In
such instances, the first two characters are assumed to be "19". Beginning in
the year 2000 or perhaps earlier if referencing a date in the year 2000, such
computer systems and software products may recognize a date using "00" as the
year 1900, rather than the year 2000, which could result in miscalculations or
system failures. To address the year 2000 issue, in early 1998 Mattel
established a project team and initiated a comprehensive plan that is designed
to assess, remediate and test Mattel's internal systems, hardware and processes,
including key operational, manufacturing and financial systems. The progress of
this plan is continually monitored and regularly reported to management. In
addition, Mattel's board of directors is regularly informed about the year 2000
issue both generally and as it may affect Mattel's business.
Mattel's internal year 2000 project team oversees all aspects of implementing
the plan. The team is comprised of staff members from the information systems
department having the requisite knowledge of Mattel's computer systems,
including all the technical aspects of the systems. Key user group designees
from business areas are included on each system team, which is guided by a
central project team. Mattel has not engaged outside consultants, technicians or
other external resources to assist in formulating and implementing the program.
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<PAGE>
Mattel's plan adheres to a multi-step process that includes five distinct phases
of activity: (1) awareness; (2) inventory and risk assessment; (3) code and
system modification; (4) testing; and (5) business interruption and contingency
planning.
Under the first two phases of the plan, all operational, manufacturing and
financial systems were inventoried and evaluated. This inventory included all
software systems, computer hardware, facilities, and production equipment
containing or depending upon a computer chip. As a result of such evaluation,
Mattel established detailed plans and action steps required to address all
aspects of the year 2000 issue, including all code and system modifications
(phase 3). Mattel completed the awareness, inventory and code change phases of
the plan as scheduled prior to December 1998. Critical system verification and
testing (phase 4) is expected to be complete by July 1999.
Mattel initiated formal communications with each of its significant suppliers
and customers to determine the extent to which they are addressing the year 2000
issue and the effect on its business should those parties fail to adequately
address the issue. To date, Mattel has received responses from the majority of
the initial contacts. These responses have been positive and support the overall
initiatives toward achieving year 2000 compliance. Mattel is actively following-
up with those customers and suppliers failing to reply to the initial inquiry.
Due to the general uncertainty inherent in the year 2000 issue, largely
resulting from uncertainty as to the readiness of third-party suppliers and
customers, Mattel is currently unable to assess the overall impact of the year
2000 issue on its business. The risk of third-party suppliers and customers not
correcting a material year 2000 problem could result in an interruption in, or a
failure of, certain normal business activities or operations of such suppliers,
customers, and/or Mattel. Such failures could materially and adversely affect
Mattel's results of operations, liquidity and financial position. As a result,
during the first half of 1999 Mattel is developing contingency plans (phase 5),
which it expects to be complete by July 1999. Contingency planning is being done
on a worldwide basis by all of Mattel's business units. Each unit will
concentrate on factors external to Mattel that may adversely impact their
ability to conduct operations. Specifically, for those locations where a high
likelihood of a material failure exists, Mattel will establish revised
procedures for managing operations, including identification of alternate
suppliers and vendors whose systems are year 2000 compliant.
While there is no guarantee, management believes that Mattel's year 2000 plan
should greatly reduce its level of uncertainty about the issue and mitigate the
possibility of significant interruptions of ongoing operations. Additionally,
its global presence and broad-based manufacturing capability should provide
Mattel with numerous options to further mitigate the risk of year 2000 non-
compliance.
17
<PAGE>
As of March 31, 1999, Mattel has spent approximately $8 million and expects to
incur a total of approximately $11 million in connection with addressing the
year 2000 issue. These costs are largely due to the use of internal resources
dedicated to achieving year 2000 compliance. Costs are charged to expense as
they are incurred. Work on the year 2000 issue has not delayed any internal
projects that would have a material effect on Mattel's consolidated financial
position or results of operations. All costs of addressing the year 2000 issue
will be funded from internally generated cash.
Mattel sells software products as part of its core businesses. All software
products currently available for sale to consumers and those products previously
purchased by consumers are year 2000 compliant. Software products developed for
Mattel by third parties under development agreements have been certified as year
2000 compliant by such developers. Mattel will continue to ensure that all its
software products currently in development are year 2000 compliant.
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<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
3.0** Certificate of Designations, Preferences, Rights and Limitations
of Special Voting Preferred Stock of Mattel, Inc.
4.0** Amendment No. 1 to Rights Agreement, dated May 13, 1999, between
Mattel, Inc. and BankBoston, N.A.
11.0** Computation of Income (Loss) per Common and Common Equivalent
Share
12.0** Computation of Ratio of Earnings to Fixed Charges and Ratio
of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
27.0** Financial Data Schedule (EDGAR filing only)
99.0 Plan of Arrangement of Softkey Software Products Inc. under
Section 182 of the Business Corporations Act (Ontario)
(incorporated by reference to Exhibit 4.4 of The Learning
Company, Inc.'s Registration Statement on Form S-3, Registration
No. 333-40549)
99.1 Voting and Exchange Trust Agreement, dated as of February 4,
1994 among The Learning Company, Inc., Softkey Software Products
Inc. and R-M Trust Company, as Trustee (incorporated by
reference to Exhibit 4.3 of The Learning Company, Inc.'s
Registration Statement on Form S-3, Registration No. 333-40549)
99.2 Support Agreement, dated as of February 4, 1994 between The
Learning Company, Inc. and Softkey Software Products Inc.
(incorporated by reference to Exhibit 99.4 of Mattel, Inc.'s
Form S-4, Registration No. 333-71587)
99.3** Voting and Exchange Trust Supplement, dated as of May 12, 1999,
between Mattel, Inc., The Learning Company, Inc., Softkey
Software Products Inc. and CIBC Mellon Trust Company, as Trustee
99.4** Support Agreement Amending Agreement, dated as of May 12, 1999,
between Mattel, Inc., The Learning Company, Inc. and Softkey
Software Products Inc.
99.5** Rights Agreement, dated as of May 13, 1999, between Softkey
Software Products Inc., Mattel, Inc. and CIBC Mellon Trust
Company, as Rights Agent
- --------------
** Previously filed.
(b) Reports on Form 8-K
-------------------
Mattel filed the following Current Reports on Form 8-K during the
quarterly period ended March 31, 1999:
<TABLE>
<CAPTION>
Date of Report Items Reported Financial Statements Filed
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
February 3, 1999 5 None
March 5, 1999 5,7 None
</TABLE>
19
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTEL, INC.
--------------------------
(Registrant)
Date: As of June 9, 1999 By: /s/ Kevin M. Farr
------------------- --------------------------
Kevin M. Farr
Senior Vice President and Corporate
Controller
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