<PAGE>
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 (Date of Earliest Event Reported): June 11, 1999
MATTEL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 001-05647 95-1567322
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File No.) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 252-2000
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N/A
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(Former name or former address, if changed since last report)
<PAGE>
Information to be included in the Report
----------------------------------------
Item 5. Other Events
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In conformity with the requirements of Regulation S-X, Rule 3.05
(b), attached hereto as Exhibit 99.1 are the restated, combined
balance sheets of Mattel, Inc. and Subsidiaries ("Mattel") as of
December 31, 1998 and 1997 and the statements of operations,
cash flows and stockholders' equity for the years ended December
31, 1998, 1997 and 1996 and the related notes thereto. Such
financial statements and the related Supplementary Management's
Discussion and Analysis of Financial Condition and Results of
Operations (also filed with Exhibit 99.1) have been prepared to
reflect the retroactive effect of Mattel's merger with The
Learning Company, Inc. ("Learning Company"), consummated May 13,
1999, accounted for as a pooling of interests (the "Merger").
The Supplementary Management's Discussion and Analysis of
Financial Condition and Results of Operations included in
Exhibit 99.1 relates to Mattel's restated financial condition
and results of operations through December 31, 1998 and other
than giving retroactive effect to the Merger, does not reflect
any subsequent events.
In conformity with the requirements of Regulation S-X, Rule 3-
05(b), attached hereto as Exhibit 99.2 are the restated,
combined balance sheets of Mattel as of and for the three-month
periods ended March 31, 1999 and 1998 and December 31, 1998 and
the statements of operations, cash flows and stockholders'
equity for the three-month periods ended March 31, 1999 and 1998
and the related notes thereto. Such financial statements and the
related Supplementary Management's Discussion and Analysis of
Financial Condition and Results of Operations (also filed with
Exhibit 99.2) have been prepared to reflect the retroactive
effect of the Merger. The Supplementary Management's Discussion
and Analysis of Financial Condition and Results of Operations
included in Exhibit 99.2 relates to Mattel's restated financial
condition and results of operations through March 31, 1999 and
other than giving retroactive effect to the merger, does not
reflect any subsequent events.
Item 7. Financial Statements, Pro Forma Financial Statements
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and Exhibits.
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(a) Financial Statements of Businesses Acquired.
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None
(b) Pro Forma Financial Information.
-------------------------------
None
(c) Exhibits.
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23.0 Consent of PricewaterhouseCoopers LLP
23.1 Consent of Deloitte & Touche LLP
99.1 Supplementary Consolidated Financial Statements for
the years ended December 31, 1998, 1997 and 1996 and
related Supplementary Management's Discussion and
Analysis of Financial Condition and Results of
Operations of Mattel
99.2 Supplementary Consolidated Financial Statements for
the three-month periods ended March 31, 1999 and 1998
and related Supplementary Management's Discussion and
Analysis of Financial Condition and Results of
Operations of Mattel
<PAGE>
SIGNATURES
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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
Date: June 11, 1999 By: /s/ KEVIN M. FARR
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Kevin M. Farr
Senior Vice President and
Corporate Controller
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in each of the twelve
Registration Statements on Form S-8 (No. 33-14717, No. 33-51454, No. 33-34920,
No. 33-57082, No. 33-62185, No. 333-01061, No. 333-03385, No. 333-47459, No.
333-47461, No. 333-67493, No. 333-75145 and No. 333-79099), in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 333-68017 and
No. 333-73177), and in the Prospectus constituting part of the Registration
Statement on Form S-4 (No. 333-71587 of Mattel, Inc. and its subsidiaries of our
report dated February 1, 1999, except as to Note 8 and the merger with The
Learning Company, Inc. described in Note 12 which are as of May 28, 1999,
which appears in this Current Report on Form 8-K.
/s/ PRICEWATERHOUSECOOPERS LLP
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Los Angeles, California
June 8, 1999
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in each of the twelve Registration
Statements on Form S-8 (No. 33-14717, No. 33-51454, No. 33-34920, No. 33-57082,
No. 33-62185, No. 333-01061, No. 333-03385, No. 333-47459, No. 333-47461, No.
333-67493, No. 333-75145 and No. 333-79099), in the Prospectuses constituting
part of the Registration Statements on Form S-3 (No. 333-68017 and No. 333-
73177), and in the Prospectus constituting part of the Registration Statement on
Form S-4 (No. 333-71587) of Mattel, Inc. of our report dated February 4, 1997
(except for note 15, as to which the date is March 27, 1997) relating to the
consolidated financial statements of Tyco Toys, Inc. and subsidiaries, not
presented separately herein, appearing in this Current Report on Form 8-K of
Mattel, Inc.
/s/ DELOITTE & TOUCHE LLP
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Philadelphia, Pennsylvania
June 8, 1999
<PAGE>
EXHIBIT 99.1
Supplementary Management's Discussion and Analysis of Financial
---------------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Mattel, Inc. and Subsidiaries
Cautionary Statement
Certain expectations and projections regarding the future performance of Mattel,
Inc. and its subsidiaries (the "Company") discussed herein are forward-looking
and are made under the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These expectations and projections are based on
currently available competitive, financial, and economic data along with the
Company's operating plans and are subject to certain future events and
uncertainties. Forward-looking statements can be identified by the use of
forward-looking terminology, such as may, will, should, expect, anticipate,
estimate, continue, plans, intends or other similar terminology. Management
cautions you that the following factors, among others, could cause the Company's
actual consolidated results of operations and financial position in 1999 and
thereafter to differ significantly from those expressed in forward-looking
statements:
. Marketplace Risks
- Increased competitive pressure, both domestically and internationally, which
may affect the sales of the Company's products
- Significant changes in the buying patterns of major customers, such as the
recent shift by some retailers to just-in-time inventory management, which
may limit the Company's ability to accurately forecast reorders or cause a
decrease in sales after related expenses have already been incurred
- Dependence on the timely development, introduction and customer acceptance
of new products, which may affect the Company's ability to successfully
redesign, restyle and extend existing core products and product lines and to
successfully bring new products to market
- Possible weaknesses in economic conditions, both domestically and
internationally, which may affect the sales of the Company's products and
the costs associated with manufacturing and distributing these products
. Financing Considerations
- Currency fluctuations, which may affect the Company's reportable income
- Significant changes in interest rates, both domestically and
internationally, which may affect the Company's cost of financing both its
operations and investments
. Merger-Related Risks
- Difficulty integrating the operations of The Learning Company, Inc. and its
subsidiaries ("Learning Company") into Mattel (together with its
subsidiaries "Mattel") following the May 1999 merger, which may impede the
Company's ability to achieve savings or operating synergies from the merger
. Year 2000 Compliance
- Potential inability of computer systems or software products used by the
Company and/or its customers and suppliers to properly recognize and process
date-sensitive information beyond January 1, 2000, which may result in an
interruption in normal business operations of the Company, its suppliers and
customers
- Potential inability of software products sold by the Company to properly
recognize and process date-sensitive information beyond January 1, 2000,
which may result in increased costs, lost sales or other negative
consequences resulting from customer dissatisfaction, including litigation
or other claims for damages
<PAGE>
. Other Risks
- Inability to achieve cost savings expected as part of restructuring
activities, which may result in higher than expected costs following such
restructurings
- Development of new technologies, including the Internet, which may create
new risks to the Company's ability to protect its intellectual property
rights
- Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products or environmental activities or
trade restrictions, which may lead to increased costs or interruption in
normal business operations of the Company
- Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal
business operations of the Company
- Other factors that may be described from time to time in the Company's
filings with the Securities and Exchange Commission
Summary
You should read this discussion in conjunction with the Company's supplementary
consolidated financial statements included herein. This Supplementary
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the accompanying supplementary consolidated financial statements
have been prepared to reflect the retroactive effect of Mattel's merger with
Learning Company, consummated in May 1999. The merger was accounted for as a
pooling of interests, which means that for accounting and financial reporting
purposes, Mattel's consolidated financial statements have been restated to
present the combined companies' financial position and results of operations for
each period presented. This discussion relates to the Company's financial
position and results of operations through December 31, 1998 and other than
giving retroactive effect to the merger, does not reflect any subsequent events.
As used herein, any reference to the "Company" reflects the combined Mattel and
Learning Company results. Any reference to "Mattel" or "Learning Company"
reflects the individual activities of either Mattel or Learning Company,
respectively. Unless the context clearly indicates otherwise, all financial
results described herein reflect the combined Mattel and Learning Company
results.
The Company designs, manufactures, and markets a broad variety of
children's products on a worldwide basis through both sales to retailers and
direct to consumers. Additionally, the Company develops and markets consumer
software for home personal computers. The Company's business is dependent in
great part on its ability each year to redesign, restyle and extend existing
core products and product lines, to design and develop innovative new products
and product lines, and to expand its marketing capability.
The Company plans to continue to focus on its portfolio of brands that have
fundamental play patterns and have historically had worldwide appeal, have been
sustainable, and have delivered consistent profitability. The Company's
portfolio of brands can be grouped in the following categories:
<PAGE>
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R), and Polly Pocket(R)
Infant and Preschool - including Fisher-Price(R), Disney preschool and plush,
Power Wheels(R), Sesame Street(R), See `N Say(R), Magna Doodle(R), and View-
Master(R)
Entertainment - including Disney, Nickelodeon(R), games, and puzzles
Wheels - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and
Tyco(R) Radio Control
Consumer Software - including Reader Rabbit(R), Carmen Sandiego(TM), The Oregon
Trail(R), Riven(R), The ClueFinders(TM), Kid Pix(R), CyberPatrol(R) and Family
Tree Maker(R)
Segment Information
The Company's reportable segments are separately managed business units and
include: toy marketing, toy manufacturing, and consumer software sales and
development. The toy marketing segment is divided on a geographic basis between
domestic and international. The domestic toy segment is further divided into USA
Toys, Fisher-Price/Tyco Preschool and Other. USA Toys principally sells products
in the Girls, Entertainment and Wheels categories, while Fisher-Price/Tyco
Preschool sells principally Infant and Preschool products. The Other toy segment
is principally involved in selling specialty products in the Girls category. The
international toy segment sells products in all categories. The consumer
software segment is comprised of educational and entertainment products
developed and sold by Learning Company on a worldwide basis. The Company's toy
manufacturing segment, Operations, manufactures toy products, which are sold to
the toy marketing segments. Financial information regarding the Company's
segments can be found in Note 8 to the supplementary consolidated financial
statements.
<PAGE>
Results of Operations
The following is a percentage analysis of operating results for the past three
years:
<TABLE>
<CAPTION>
For the Year
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1998 1997 1996
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<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
======= ======= =======
Gross profit 51.8% 51.7% 51.1%
Advertising and promotion expenses 16.3 15.5 16.1
Other selling and administrative expenses 20.3 18.6 18.5
Amortization of intangibles 2.3 8.9 9.2
Restructuring and other charges 2.8 6.3 0.2
Charge for incomplete technology 1.0 0.4 1.1
Other income, net (0.2) (0.1) (0.2)
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Operating profit 9.3 2.1 6.2
Interest expense 2.3 2.1 2.5
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Income before income taxes and
extraordinary item 7.0% 0% 3.7%
======= ======= =======
</TABLE>
1998 Compared to 1997
Net income for 1998 was $206.1 million or $0.47 per diluted share as compared to
a loss of $182.7 million or $0.52 per diluted share in 1997. Net income for 1998
was impacted by a $105.8 million after-tax charge ($0.25 per diluted share)
related to integration and restructuring charges incurred by Learning Company,
a one-time charge in connection with the voluntary recall of certain Power
Wheels(R) ride-on vehicles and a Toys R Us-related antitrust litigation
settlement. Net sales for 1998 reached $5.6 billion, an increase of 3% from $5.5
billion in 1997, primarily due to higher software sales, which were partially
offset by cutbacks in purchases by toy retailers to adjust to a just-in-time
buying pattern. Sales in the Girls category decreased 4% largely due to a 14%
decline in Barbie(R) products, as a result of high retail inventory levels
entering 1998. As a result of the Pleasant Company acquisition in July 1998, the
American Girl(R) brand contributed $213.2 million in gross sales, which helped
to partially offset the decline in Barbie(R). Sales in the Infant and Preschool
category decreased 3%, largely attributable to declines in Sesame Street(R) and
Fisher-Price(R) products, partially offset by an increase in Disney's Winnie the
Pooh(R). Sales in the Wheels category grew 21%, reflecting growth in both Hot
Wheels(R) and Matchbox(R) vehicles and playsets. Sales in the Entertainment
category, which includes Disney and Nickelodeon(R), increased 14% largely due to
this year's introduction of toys associated with the feature motion pictures "A
Bug's Life" and "The Rugrats Movie". Sales of Learning Company consumer software
products increased 35%, mainly due to the acquisition of Mindscape, Inc. which
added $188.1 million to 1998 net sales, introduction of new software titles such
as The ClueFinders(TM) 4th Grade Adventures and Arthur's(R) Computer Adventures,
and upgraded products.
<PAGE>
Sales to customers within the US increased 6% and accounted for 71% and 69% of
consolidated net sales in 1998 and 1997, respectively. Sales to customers
outside the US were down 4%, including an unfavorable foreign exchange effect
due to the generally stronger US dollar relative to 1997.
Gross profit as a percentage of net sales remained relatively constant at
51.8% compared to 51.7% in 1997. As a percentage of net sales, advertising and
promotion expenses increased approximately one percentage point to 16.3%, and
selling and administrative expenses increased approximately two percentage
points to 20.3%. Both ratios increased relative to 1997 as a result of
unanticipated cutbacks in buying by toy retailers due to a continuing shift by
these retailers to just-in-time inventory management. To respond to such
shifts, the Company took appropriate actions to adjust its own shipping to more
of a just-in-time pattern. As a result, toy products that would have previously
been shipped in December will be shipped closer to the time that they will be
purchased by the consumer. The Company plans to manage its advertising and
selling and administrative levels in 1999 to bring them back in line with its
historical ratios. Amortization of intangibles decreased by $357.5 million,
mainly as a result of intangibles related to Learning Company's acquisitions of
Minnesota Educational Computing Corporation and the Former Learning Company
being fully amortized in 1997. This decrease was partially offset by
amortization of intangibles resulting from the 1998 acquisitions of Pleasant
Company, Sofsource, Inc., Bluebird Toys PLC ("Bluebird") and Mindscape, Inc.
The charge for incomplete technology in 1998 relates primarily to Learning
Company's write-off of products being developed by Mindscape, Inc. of $40.0
million and Sofsource, Inc. of $14.9 million, while the 1997 charge relates to
Learning Company's write-off of products being developed by Creative Wonders
L.L.C., Parsons Technology Inc., and Living Books.
Interest expense increased $15.9 million primarily due to increased short-
and long-term borrowings to finance the 1998 acquisitions of Pleasant Company
and Bluebird, partially offset by the repurchase of certain of the 5-1/2% senior
notes of Learning Company.
Other income, net increased $8.3 million, mainly due to an $11.1 million
gain realized on sale of investments.
<PAGE>
1997 Compared to 1996
Net loss for 1997 was $182.7 million or $0.52 per diluted share as compared to
net income of $22.0 million or $0.04 per diluted share in 1996. The 1997 net
loss was impacted by a $343.6 million charge related to nonrecurring charges for
transaction, integration and restructuring costs related to the Mattel
restructuring and Tyco integration, Learning Company restructuring costs, and an
extraordinary loss of $4.6 million net of taxes for the early retirement of debt
assumed as part of Mattel's merger with Tyco. Net sales for 1997 were $5.5
billion, an increase of 8% from $5.1 billion in 1996. Sales in the Girls
category grew 5% due to the strength in Barbie(R) and Barbie(R)-related
products, partially offset by declines in large and small dolls. Sales in the
Infant and Preschool category increased 15%, led by strength in Sesame Street(R)
and Disney's Winnie the Pooh (R), partially offset by a decline in Fisher-
Price(R) products. The Wheels category increased 21%, driven by an increase in
Hot Wheels(R). Sales in the Entertainment category, which includes Disney and
Nickelodeon(R), decreased 4%. Sales of Learning Company consumer software
products increased 17%, primarily due to the introduction of new software
products, such as Reader Rabbit's Toddler(R), Reader Rabbit's Preschool(R),
Reader Rabbit's Kindergarten(R) and Reader Rabbit's(R) 1st Grade, The Oregon
Trail(R) 3rd Edition: Pioneer Adventures(TM), and Riven(R).
Sales to customers within the US grew 14% and accounted for 69% of
consolidated net sales in 1997 compared to 65% in 1996. Sales to customers
outside the US decreased 4%, including the unfavorable foreign exchange effect
of the generally stronger US dollar relative to the prior year.
Gross profit, as a percentage of net sales remained virtually constant at
51.7% from 51.1%. As a percentage of net sales, advertising and promotion
expenses decreased approximately one percentage point to 15.5%, primarily due to
cost savings realized from Mattel's merger with Tyco. As a percentage of net
sales, other selling and administrative expenses remained relatively constant at
18.6% from 18.5%, reflecting the impact of Mattel's effort to control costs and
direct cost savings realized from the 1997 integration and restructuring plan.
Interest expense decreased $14.3 million largely due to lower average domestic
short-term borrowings during 1997, and the repurchase of a portion of the 5-1/2%
senior notes of Learning Company.
Income Taxes
The effective income tax rates for 1998 and 1997 were substantially higher than
the federal tax rate of 35%. This increased rate was the result of non-
deductible items such as amortization of intangibles, restructuring, and write-
off of incomplete technology associated with Learning Company's acquisitions of
businesses in the computer software industry. The increase was partially offset
by income earned in foreign jurisdictions, which was taxed at lower rates.
<PAGE>
Pre-tax losses from US operations as a percentage of the consolidated pre-
tax income was less than the sales to US customers as a percentage of the
consolidated gross sales. This difference results from amortization of
intangibles, write-off of incomplete technology, and corporate headquarters
expenses incurred in the US that decreased US pre-tax income and from profits
from foreign manufacturing activities that relate to sales ultimately made to US
customers.
Financial Position
The Company's financial position remained strong in 1998 primarily due to its
profitable operating results. At December 31, 1998, the Company's cash position
was $469.2 million, compared to $883.9 million as of the end of 1997. Cash
decreased $414.7 million primarily due to cash consideration paid in connection
with the acquisitions of Mindscape, Inc., Pleasant Company, Sofsource, Inc. and
Bluebird. Accounts receivable decreased $103.3 million to $1.2 billion due to
lower orders by major toy retailers in the fourth quarter of 1998. Inventories
increased $176.0 million to $644.3 million, reflecting the sales shortfall in
the 1998 fourth quarter and the addition of Pleasant Company inventory.
Property, plant and equipment, net grew $122.5 million to $763.1 million due to
assets acquired as part of the acquisition of Pleasant Company and investments
in the expansion of the Company's toy manufacturing facilities located in Mexico
and Asia. Intangibles increased $799.9 million to nearly $1.5 billion due to
goodwill generated from the Pleasant Company, Sofsource, Inc., Bluebird, and
Mindscape, Inc. acquisitions.
Short-term borrowings increased $146.4 million compared to 1997 from
financing the Company's acquisitions.
A summary of the Company's capitalization is as follows:
<TABLE>
<CAPTION>
As of Year End
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(In millions) 1998 1997
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<S> <C> <C> <C> <C>
Senior notes $ 600.9 17% $ 393.7 13%
Medium-term notes 540.5 16 520.5 17
Other long-term debt obligations 43.0 1 43.5 1
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Total long-term debt 1,184.4 34 957.7 31
Other long-term liabilities 149.1 4 153.0 5
Stockholders' equity 2,170.8 62 1,933.3 64
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$3,504.3 100% $3,044.0 100%
======== ======== ========= =========
</TABLE>
<PAGE>
Total long-term debt increased $226.7 million mainly due to the issuance of
$300.0 million of senior notes to finance the acquisitions of Pleasant Company
and Bluebird. Medium-term notes increased by $20.0 million due to the issuance
of $50.0 million in notes, partially offset by the reclassification of $30.0
million payable in 1999 to current portion of long-term debt. The Company
expects to satisfy its future long-term capital needs through the retention of
corporate earnings and the issuance of long-term debt instruments. In November
1998, the Company filed its current universal shelf registration statement
allowing it to issue up to $400.0 million of debt and equity securities, all of
which was available to be issued as of December 31, 1998. Stockholders' equity
of $2.2 billion increased from 1997 as a result of profitable operating results
and reissuance of treasury stock for the exercise of nonqualified stock options
by the Company's employees, partially offset by treasury stock purchases and
dividend declarations on common and preferred stock.
Liquidity
The Company's primary sources of liquidity over the last three years have been
cash on hand at the beginning of the year, cash flows generated from operations,
long-term debt issuances and short-term seasonal borrowings. Profitable
operating activities generated cash flows of $597.4 million during 1998,
compared to $532.5 million in 1997 and $601.8 million in 1996.
The Company invested its cash flows during the last three years in the
acquisitions of Pleasant Company, Sofsource, Inc., Bluebird and Mindscape, Inc.,
additions to tooling in support of new products, and construction of new
manufacturing facilities.
The Company received cash flows from the issuance of senior notes in 1998,
and medium-term notes and special warrants in 1998 and 1997. Cash received from
these debt issuances was used to fund the acquisitions of Pleasant Company,
Mindscape, Inc. and Bluebird, to retire higher-cost debt and to support
operating activities. In 1998, Mattel repaid the long-term debt and mortgage
note assumed as part of the Pleasant Company acquisition. In 1997, Mattel
redeemed the 10-1/8% notes assumed as part of the acquisition of Tyco and repaid
its 6-7/8% senior notes upon maturity. Cash was also spent during the last three
years to purchase treasury stock to provide shares for issuance under the
Company's employee stock option plans and the exercise of outstanding warrants.
In addition, over the last three years, the Company has consistently increased
its cash payments for common dividends.
<PAGE>
Seasonal Financing
The Company expects to finance its seasonal working capital requirements for the
coming year by using existing and internally generated cash, issuing commercial
paper, selling certain trade receivables and using various short-term bank lines
of credit. The Company's domestic committed unsecured credit facility provides
$1.0 billion in short-term borrowings from a commercial bank group. This
facility provides for up to $700.0 million in advances and backup for commercial
paper issuances, and up to an additional $300.0 million for nonrecourse
purchases of certain trade accounts receivable by the bank group over the next
four years. Under its domestic credit facility, the Company is required to meet
financial covenants for consolidated debt-to-capital and interest coverage.
Currently the Company is in compliance with such covenants.
The Company also expects to have approximately $370 million of individual
short-term foreign credit lines with a number of banks available in 1999, which
will be used as needed to finance seasonal working capital requirements of
certain foreign affiliates.
Learning Company had a revolving line of credit, which provided for a
maximum availability of $147.5 million. In addition, Learning Company was party
to a receivable purchase agreement for nonrecourse sales of certain trade
accounts receivable of up to $100.0 million. Learning Company also had a
European accounts receivable facility for sales with recourse of certain
European trade accounts receivable of up to $25.0 million. Upon consummation of
the May 1999 merger, all outstanding borrowings under the revolving line of
credit and European accounts receivable facility were repaid and both the
revolving line of credit agreement, and domestic and European accounts
receivable facilities were terminated.
Acquisitions
During the last three years, the Company completed the following acquisitions,
which were accounted for using the purchase method of accounting. The results
of operations of the acquired companies have been included in the Company's
supplementary consolidated financial statements from their respective dates of
acquisition.
In July 1998, Mattel acquired Pleasant Company, a Wisconsin-based direct
marketer of books, dolls, clothing, accessories, and activity products included
under the American Girl(R) brand name for approximately $715 million. The excess
of cost over the estimated fair market value of tangible net assets acquired was
approximately $690 million. The excess was allocated to customer lists, a
covenant not-to-compete, and magazine subscription lists that are being
amortized on a straight-line basis over a 3 to 15 year period, with the
remaining excess being amortized on a straight-line basis over 40 years.
In June 1998, Mattel acquired Bluebird, a company organized in the United
Kingdom, from which Mattel previously licensed the product designs for the Polly
Pocket(R) and Disney Tiny Collections brands, as well as the Polly Pocket(R)
trademarks for approximately $80 million. The excess of cost over the estimated
fair market value of tangible net assets acquired was approximately $60 million,
which is being amortized on a straight-line basis over 40 years.
<PAGE>
In June 1998, Learning Company acquired Sofsource, Inc., an educational
software company for $45.0 million. Of the purchase price, $14.9 million was
allocated to incomplete technology. Such amount was charged to expense during
1998, while the amounts allocated to brands and trade names, and goodwill are
being amortized on a straight-line basis over 10 years.
In March 1998, Learning Company acquired Mindscape, Inc., a consumer
software company, and certain affiliated companies for $152.6 million. Of the
purchase price, $40.0 million was allocated to incomplete technology. Such
amount was charged to expense during 1998, while the amounts allocated to
completed technology and products, brands and trade names, and goodwill are
being amortized on a straight-line basis over 2, 10, and 10 years, respectively.
In October 1997, Learning Company acquired Creative Wonders, L.L.C., an
educational software company for $37.8 million. Of the purchase price, $1.1
million was allocated to incomplete technology. Such amount was charged to
expense during 1997, while the amount allocated to brands and related content
rights is being amortized on a straight-line basis over 10 years.
In August 1997, Learning Company acquired Parsons Technology, Inc., a
direct-to-consumer marketing organization, which publishes a range of consumer
software for $31.0 million. Of the purchase price, $10 million was allocated to
incomplete technology. Such amount was charged to expense during 1997, while
the amounts allocated to customer lists and brands and related content rights
are being amortized on a straight-line basis over 3 and 10 years, respectively.
In May 1996, Learning Company acquired Minnesota Educational Computing
Corporation, a publisher and developer of high quality children's educational
software sold to consumers and schools for $284.6 million. Of the purchase
price, $56.7 million was allocated to incomplete technology. Such amount was
charged to expense during 1996, while amounts allocated to completed technology,
brands and related content rights, and goodwill are being amortized on a
straight-line basis over 2, 10, and 10 years, respectively.
Learning Company also made other minor acquisitions during 1997 and 1996,
which were accounted for using the purchase method.
<PAGE>
Business Combinations and Related Integration, Restructuring, and Other
Nonrecurring Charges
Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a
merger was consummated between Mattel and Learning Company on May 13, 1999. The
stock-for-stock transaction was approved by the stockholders of both companies,
after which Learning Company was merged with and into Mattel, with Mattel being
the surviving corporation. Each share of Learning Company Series A Preferred
Stock was converted into 20 shares of Learning Company common stock just prior
to the consummation of the merger. According to the merger agreement, each
outstanding share of Learning Company common stock was then converted into the
right to receive 1.2 shares of Mattel common stock. As a result, approximately
126 million Mattel common shares were issued in exchange for all shares of
Learning Company common stock outstanding as of the merger date. The transaction
has been accounted for as a pooling of interests.
In connection with its merger with Learning Company and a planned
realignment of Mattel's operations to reduce overhead costs, Mattel announced
that it 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 duplicate 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. The Company expects to fund this restructuring through existing cash
balances and internally generated cash from operations. The Company expects the
combined actions to result in cost savings of approximately $50 million in 1999
and at least $400 million over the following three years. However, the amount of
expected cost savings are preliminary estimates and the Company cannot assure
that its actions will result in these savings.
In August 1998, Learning Company completed its merger with Broderbund
Software, Inc. ("Broderbund"), a publisher and developer of consumer software
for the home and school market. The merger was accounted for as a pooling of
interests. Under the merger agreement, each share of Broderbund common stock was
exchanged into 0.80 shares of Learning Company's common stock, which resulted in
the issuance of approximately 17 million shares of Learning Company common
stock.
<PAGE>
Learning Company also acquired Palladium Interactive, Inc. and P.F. Magic,
Inc. in 1998 and TEC Direct, Inc., Microsystems Software, Inc., Skills Bank
Corporation and Learning Company Services, Inc. in 1997, each of which were
accounted for as pooling of interests. The supplementary consolidated financial
statements have not been retroactively restated for the results of operations
and financial position of these companies as they were deemed to be immaterial
to the supplementary consolidated financial statements for those periods.
In March 1997, Mattel completed its merger with Tyco. The merger was
accounted for as a pooling of interests. Under the merger agreement, each Tyco
common stockholder received 0.48876 shares of Mattel common stock for each share
of Tyco common stock outstanding, which resulted in the issuance of
approximately 17 million Mattel common shares. Each share of Tyco Series B and
Series C preferred stock was converted into like Mattel preferred stock.
In connection with the merger with Tyco, Mattel commenced an integration
and restructuring plan and recorded a $275.0 million pre-tax charge against
operations in March 1997. After related tax effects, the Company's 1997
earnings were impacted by $0.57 per diluted share as a result of the net $209.7
million charge. The integration and restructuring activity was substantially
complete as of December 31, 1998. The Company realized annualized cost savings
of approximately $160 million, mainly in the areas of cost of production,
advertising, selling and administrative expenses, and financing costs.
In the 1998 third quarter, Mattel recognized a $38.0 million pre-tax charge
related to a voluntary recall of certain Power Wheels(R) ride-on vehicles. The
recall did not result from any serious injury, and involves the replacement of
electronic components that may overheat, particularly when consumers make
alterations to the product.
In the 1998 fourth quarter, Mattel recognized a $6.0 million pre-tax charge
related to the settlement of the Toys R Us related antitrust litigation. The
settlement agreement calls for cash and toy contributions by the Company prior
to November 1999.
Litigation
Beaverton, Oregon
Mattel operates a manufacturing facility on a leased property in Beaverton,
Oregon that was acquired as part of its merger with Tyco. In March 1998,
samples of groundwater used by the facility for process water and drinking water
disclosed elevated levels of certain chemicals, including trichloroethylene
("TCE"). Mattel immediately closed the water supply and self-reported the
sample results to the Oregon Department of Environmental Quality ("DEQ") and the
Oregon Health Division. Mattel also implemented an employee communication and
medical screening program.
<PAGE>
In November 1998, Mattel and another potentially responsible party entered
into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the site, to propose an interim remedial
action measure and to continue the community outreach program to employees,
former employees and surrounding landowners. It is not presently possible to
estimate the cost to the Company related to the DEQ's investigation and any
subsequent orders for future work.
Toys R Us
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc. The
administrative law judge made findings of fact and conclusions of law that the
toy retailer Toys R Us, Inc. had violated federal antitrust laws and entered
into vertical and horizontal arrangements with various toy manufacturers,
including Mattel, whereby the manufacturers would refuse to do business with
warehouse clubs, or would do business with warehouse clubs only on terms
acceptable to Toys R Us. On October 13, 1998, the Federal Trade Commission
issued an opinion and a final order affirming the findings and conclusions of
the administrative law judge. Toys R Us has now filed a notice of appeal in the
United States Court of Appeals for the Seventh Circuit.
Following the announcement of the administrative law judge's decision,
Mattel was named as a defendant, along with certain other toy manufacturers, in
a number of antitrust actions in various states related to the Toys R Us matter.
Mattel has also been named as a defendant in a series of private treble damage
class actions under federal antitrust laws that have been filed in various
federal district courts.
Since May 1998, Mattel has participated in settlement negotiations being
conducted with the aid of a mediator. In connection with a settlement, Mattel
recognized a $6.0 million pre-tax charge in the fourth quarter of 1998. The
settlement agreement calls for the Company to make cash and toy contributions
prior to November 1999. Until such time as these matters are concluded in the
various courts involved, the Company intends to vigorously defend itself in the
litigation in which it was named involving Toys R Us.
Greenwald
On October 13, 1995, Michelle Greenwald filed a complaint against Mattel in
Superior Court of the State of California, County of Los Angeles. Ms. Greenwald
is a former employee whom Mattel terminated in July 1995. Her complaint sought
$50 million in general and special damages, plus punitive damages, for breach of
oral, written and implied contract, wrongful termination in violation of public
policy and violation of California Labor Code Section 970. Ms. Greenwald
claimed that her termination resulted from complaints she made to management
concerning general allegations that Mattel did not properly account for sales
and certain costs associated with sales and more specific allegations that
Mattel failed to properly account for certain royalty obligations to The Walt
Disney Company. During 1996 and 1997, Mattel filed motions for summary judgment
on all areas of her complaint and these motions were granted. In 1998, Ms.
Greenwald filed a notice of appeal, which is scheduled to be considered in March
1999. The Company intends to defend the action vigorously, including her
appeal.
<PAGE>
Business Combination
During December 1998, a total of six separate purported class action complaints
were filed by several stockholders of Learning Company in the Court of Chancery
of the State of Delaware in and for New Castle County against Learning Company
and its board of directors for alleged breaches of fiduciary duties in
connection with the May 1999 merger. The six complaints have since been
consolidated. The consolidated complaint seeks the certification as a class of
all Learning Company stockholders, an injunction against the merger, rescission
if the merger is consummated, damages, costs and disbursements, including
attorneys' fees. The consolidated complaint alleges that Learning Company board
of directors breached their fiduciary duties to Learning Company's stockholders
by, among other things, failing to conduct due diligence sufficient to have
discovered material, adverse information concerning Mattel's anticipated
operational and financial results and agreeing to an exchange ratio that failed
to protect Learning Company stockholders against a decline in the value of
Mattel common stock. The consolidated complaint names Mattel as an additional
defendant, claiming that Mattel aided and abetted the alleged breaches of
fiduciary duty. The Company will aggressively defend itself against the action.
Other Matters
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability, labor and
environmental cleanup, which the Company is addressing or defending in the
ordinary course of business. Management believes that any liability, which may
potentially result upon resolution of such matters, will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Commitments
In the normal course of business, the Company enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect the Company's right to create and
market certain products. These arrangements include commitments for future
inventory purchases and royalty payments. Certain of these commitments
routinely contain provisions for guaranteed or minimum expenditures during the
term of the contracts.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million. Licensing and similar
agreements with terms extending through the year 2003 contain provisions for
future guaranteed minimum payments aggregating approximately $400 million. In
addition, under a certain licensing agreement, the Company may have additional
commitments of up to $37.8 million in the year 2000 payable over three years.
<PAGE>
Foreign Currency Risk
The Company's results of operations and cash flows can be impacted by exchange
rate fluctuations. To limit the exposure associated with exchange rate
movements, the Company enters into foreign currency forward exchange and option
contracts primarily to hedge its purchase of inventory, sales and other
intercompany transactions denominated in foreign currencies. The Company's
results of operations can also be affected by the translation of foreign
revenues and earnings into US dollars.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. The Company seeks to mitigate its exposure to market
risk by monitoring its currency exchange exposure for the year and partially or
fully hedging such exposure. In addition, the Company manages its exposure
through the selection of currencies used for foreign borrowings and intercompany
invoicing. The Company does not trade in financial instruments for speculative
purposes.
Mattel's foreign currency forward exchange contracts that were used to
hedge firm foreign currency commitments as of December 31, 1998 and 1997 are
shown in the following table.
These contracts generally mature within 18 months from the date of
execution. Contracts outstanding at year-end mature during the next 13 months.
All contracts are against the US dollar and are maintained by reporting units
with a US dollar functional currency, with the exception of the Indonesian
rupiah contracts that are maintained by an entity with a rupiah functional
currency.
For the purchase of foreign currencies, fair value reflects the amount,
based on dealer quotes, that Mattel would pay at maturity for contracts
involving the same currencies and maturity dates, if they had been entered into
as of year-end 1998 and 1997. For the sale of foreign currencies, fair value
reflects the amount, based on dealer quotes, that Mattel would receive at
maturity for contracts involving the same currencies and maturity dates, if they
had been entered into as of year-end 1998 and 1997. The differences between the
fair value and the contract amounts are expected to be fully offset by foreign
currency exchange gains and losses on the underlying hedged transactions.
<PAGE>
<TABLE>
<CAPTION>
Buy Sell
-------------------------------------------------------------------------------
Weighted Weighted
Contract Average Fair Contract Average Fair
(In thousands of US dollars) Amount Contract Rate Value Amount Contract Rate Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
German marks $ 19,119 1.67 $ 18,984 $144,660 1.68 $145,688
Italian lira 20,014 1,764.00 21,155 68,358 1,660.00 67,950
Hong Kong dollars 55,829 8.02 57,790 - - -
French francs 27,435 5.62 27,536 9,105 5.82 9,479
British pounds sterling 6,548 0.60 6,415 66,856 0.61 66,950
Canadian dollars 16,144 1.55 16,545 18,794 1.46 18,119
Spanish pesetas 5,625 142.30 5,577 2,899 148.23 2,997
Dutch guilders 5,079 1.89 5,050 8,086 1.96 8,342
Japanese yen - - - 12,501 116.00 12,759
Australian dollars 4,988 1.66 5,268 21,610 1.58 21,732
Belgian francs - - - 11,641 35.46 11,871
Swiss francs 18,341 1.37 18,251 - - -
Mexican peso - - - 22,000 10.02 21,956
Indonesian rupiah 10,000 15,720.50 19,183 - - -
Singapore dollar - - - 3,962 1.64 3,943
Brazilian real - - - 2,500 1.25 2,554
--------- ---------- --------- ---------
$189,122 $201,754 $392,972 $394,340
========= ========== ========= =========
1997
German marks $ 19,179 1.78 $ 18,972 $ 65,119 1.77 $ 64,941
Italian lira 38,277 1,800.00 39,203 53,161 1,749.00 52,585
Malaysian ringitts 53,304 3.08 41,551 - - -
Hong Kong dollars 148,084 8.04 149,108 2,527 7.76 2,532
French francs - - - 38,166 5.86 37,639
British pounds sterling 32,548 0.61 32,751 72,580 0.63 73,570
Canadian dollars 22,608 1.42 22,474 - - -
Spanish pesetas - - - 13,858 148.99 13,668
Dutch guilders 12,778 2.00 12,666 36,285 1.96 35,719
Japanese yen - - - 7,956 125.73 7,659
Australian dollars 6,398 1.54 6,391 - - -
Belgian francs - - - 55,126 36.48 54,515
Swiss francs 13,677 1.44 13,454 - - -
Mexican peso - - - 4,200 8.05 4,138
Indonesian rupiah 15,230 3,930.78 9,891 - - -
Singapore dollar - - - 4,107 1.72 4,203
--------- ---------- --------- ---------
$362,083 $346,461 $353,085 $351,169
========= ========== ========= =========
</TABLE>
Mattel did not enter into any new foreign currency option contracts during
1998, and no option contracts remained outstanding as of December 31, 1998. As
of December 31, 1997, the total amount of the option contracts was $93.5 million
and the fair value was $90.5 million. Fair value reflects the amount of US
dollars Mattel would receive from the current contracts, less the option value.
The option value is determined based on dealer quotes for contracts involving
the same currencies and maturity dates.
Learning Company did not enter into any foreign currency exchange or option
contracts.
<PAGE>
Euro
The Treaty on European Economic and Monetary Union provides for the introduction
of a single European currency, the Euro, in substitution for the national
currencies of the member states of the European Union that adopt the Euro. The
transition period for member states joining the Monetary Union began on January
1, 1999 and will end on July 1, 2002 when the national currencies of member
states will cease to exist. Currently, the Company is unable to assess whether
the adoption of the Euro by the Monetary Union will have a material impact on
its financial position or results of operations in the future.
Manufacturing Risk
The Company owns and operates manufacturing facilities and utilizes third-party
manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and
Thailand. A risk of political instability and civil unrest exists in these
countries, which could temporarily or permanently damage Mattel's
manufacturing operations located there. The Company's business, financial
position and results of operations would be negatively impacted by a significant
disruption to its manufacturing operations or suppliers.
Effects of Inflation
Inflation rates in the US and in major foreign countries where the Company does
business have not had a significant impact on its results of operations or
financial position during the three years ended December 31, 1998. The US
Consumer Price Index increased 1.6% in 1998, 1.7% in 1997 and 3.3% in 1996. The
Company receives some protection from the impact of inflation from high turnover
of inventories and its ability to pass on higher prices to consumers.
Year 2000 Update
Many currently installed computer systems and software products, including
several used by the Company, are coded to accept only two-digit (rather than
four-digit) entries in the date code field used to define the applicable year.
In such instances, the first two characters are assumed to be "19". Beginning in
the year 2000 or perhaps earlier if referencing a date in the year 2000, such
computer systems and software products may recognize a date using "00" as the
year 1900, rather than the year 2000, which could result in miscalculations or
system failures. To address the year 2000 issue, in early 1998 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. The discussion
reflects the status of Mattel's implementation of its year 2000 plan as of
December 31, 1998.
<PAGE>
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 does not plan on engaging outside
consultants, technicians or other external resources to assist in formulating
and implementing the program.
Mattel's plan adheres to a multi-step process that includes five distinct
phases of activity: (1) awareness; (2) inventory and risk assessment; (3) code
and system modification; (4) testing; and (5) contingency planning.
Under the first two phases of the plan, Mattel has inventoried and
evaluated all operational, manufacturing and financial systems. This inventory
included all software systems, computer hardware, facilities, and production
equipment containing or depending upon a computer chip. As a result of such
evaluation, Mattel established detailed plans and action steps required to
address all aspects of the year 2000 issue, including all code and system
modifications (phase 3). Mattel has completed the awareness, inventory and code
change phases of the plan as scheduled prior to December 1998. Critical system
verification and testing (phase 4) for Mattel 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 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.
<PAGE>
Learning Company was acquired by Mattel in May 1999 and therefore followed
its own year 2000 readiness plan prior to the merger. For purposes of this
Supplementary Management's Discussion and Analysis of Financial Condition and
Results of Operations which relates to the Company's financial condition and
results of operations through December 31, 1998, after giving effect to the
merger, the following discussion with respect to Learning Company's year 2000
plan and readiness describes the status of such plan and its uncertainties
through December 31, 1998. The Company is in the process of evaluating Learning
Company's year 2000 plan and incorporating it into its own plan. The Company
anticipates describing the results of this effort in future filings.
As of December 31, 1998, Learning Company was in the assessment stage of
its plan. For certain known critical internal systems, Learning Company had
completed the assessment phase of its plan. Learning Company had not yet
determined a date by which it expected to complete implementation for all the
targeted areas, but it intended to complete such implementation in advance of
January 1, 2000. Learning Company had been taking, and expected to continue to
take actions, intended to resolve year 2000 issues through planned replacement
or upgrades of its internal computer equipment and software systems.
Learning Company believed that a substantial portion of its remediation and
implementation efforts with respect to internal systems would be conducted in
connection with the integration of the businesses it acquired in 1998. In 1998
Learning Company acquired Mindscape, Inc., Sofsource, Inc., P.F. Magic, Inc.,
Broderbund, and Palladium Interactive, Inc. None of these companies had made
substantial progress in its own year 2000 readiness plans with respect to
internal systems or third parties. While Learning Company was in the process of
integrating these businesses into its year 2000 readiness plan, the addition of
these businesses complicated the Learning Company's year 2000 inventory,
assessment, remediation and implementation efforts. This effect is mitigated
somewhat as Learning Company intends in most instances to move, or in certain
cases has moved or is in the process of moving, most accounting, data
processing, telephone/PBX and other information technology processes of the
business to Learning Company's systems, which are to a greater extent already
year 2000 compliant.
The Company sells both Mattel and Learning Company software products as
part of its core businesses. All Mattel software products currently available
for sale to consumers and those products previously purchased by consumers are
year 2000 compliant. Mattel software products manufactured for the Company by
third-parties under licensing agreements have been certified as year 2000
compliant by such manufacturers.
Learning Company sold software products primarily for use in homes and
schools, and has sold over the last few years products that have since been
discontinued but may still be used by consumers. Additionally, products under
development as of December 31, 1998 were being designed to be year 2000
compliant. Learning Company was also in the process of testing certain of its
products sold in the past, for year 2000 compliance. Because Learning Company's
products tend to have few time-sensitive components, the resources necessary to
test its products are not expected to be significant. However, since Learning
Company was still in the assessment phase of its readiness plan with respect to
products, it is difficult to estimate with certainty the ultimate cost of its
year 2000 plan with respect to products.
Contingency planning is being done on a worldwide basis by all business
units. Each business unit will concentrate on factors external to the Company
which may adversely impact their ability to conduct operations. Specifically,
for those locations where a high likelihood of a material failure exists, the
Company will establish revised procedures for managing operations, including
identification of alternate suppliers and vendors whose systems are year 2000
compliant. Mattel's contingency plans (phase 5) will be developed during the
first half of 1999 and will be complete by July 1999. A contingency plan for
Learning Company has not yet been developed, but contingency plans will be
instituted at the completion of Learning Company's assessment phase.
As of December 31, 1998, the Company has spent approximately $7 million and
expects to incur a total of approximately $12 million in connection with
addressing the year 2000 issue. These costs include approximately $1 million
incurred by Learning Company and a total of approximately $2 million expected to
be incurred by Learning Company. These costs are largely due to the use of
internal resources dedicated to achieving year 2000 compliance. Costs are
charged to expense as they are incurred. Work on the year 2000 issue has not
delayed any internal projects that would have a material effect on the Company's
consolidated financial position or results of operation. All costs of
addressing the year 2000 issue will be funded from internally generated cash.
While the Company is dedicating resources toward attaining year 2000
readiness, there is no assurance that the Company will be successful in its
efforts to address all year 2000 issues. If all year 2000 issues are not
properly identified and assessed or the plan implemented timely, there can be no
assurance that the year 2000 issue will not materially adversely impact the
Company's results of operations, liquidity and financial position or adversely
affect the Company's relationships with customers, vendors or others. For
example, failure to achieve year 2000 readiness for the Company's internal
systems could delay its ability to manufacture and ship products or disrupt
customer service and technical support facilities. The Company also relies on
third parties such as manufacturing suppliers and vendors and large retail
customers. If these or other third parties experience year 2000 failures or
malfunctions there could be a material adverse impact on the Company's ability
to conduct ongoing operations. Additionally, the Company could incur increased
costs, lost sales or other negative consequences resulting from customer
dissatisfaction, including litigation if its products are not year 2000
compliant.
The above discussion regarding costs, risks and estimated completion dates
for the year 2000 is based on the Company's best estimates given information
that is available on December 31, 1998, and is subject to change. Actual
results could differ from these estimates.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
-------------------------------------
and Hedging Activities. This statement requires companies to record derivatives
- ----------------------
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The Company is required to adopt this
statement for its fiscal year beginning January 1, 2001. Management believes
the adoption of this statement will not have a material impact on the Company's
consolidated financial position or results of operations.
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Mattel, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying supplementary consolidated balance sheets and the related
supplementary consolidated statements of operations, of stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Mattel, Inc. and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of Tyco Toys, Inc. and its subsidiaries, which
statements reflect net sales of $720,954,000 for the year ended December 31,
1996. Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it relates
to the amounts included for Tyco Toys, Inc. and its subsidiaries, is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
As described in Note 12, on May 13, 1999, Mattel, Inc. merged with The
Learning Company, Inc. in a transaction accounted for as a pooling of interests.
The accompanying supplementary consolidated financial statements give
retroactive effect to the merger of Mattel, Inc. with The Learning Company, Inc.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
Mattel, Inc. and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Los Angeles, California
February 1, 1999 except
as to Note 8 and the
merger with The Learning
Company, Inc. described
in Note 12 which are as
of May 28, 1999
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders
Tyco Toys, Inc.
Mount Laurel, New Jersey
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Tyco Toys, Inc. and subsidiaries for the year ended
December 31, 1996, not separately presented herein. Those financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on those financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Tyco Toys,
Inc. and subsidiaries for the year 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
F-2
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(In thousands, except
share data)
ASSETS
------
<S> <C> <C>
Current Assets
Cash and short-term investments..................... $ 469,213 $ 883,903
Accounts receivable, less allowances of $125.1
million at December 31, 1998 and $78.4 million at
December 31, 1997.................................. 1,150,051 1,253,343
Inventories......................................... 644,270 468,226
Prepaid expenses and other current assets........... 371,772 327,617
---------- ----------
Total current assets............................. 2,635,306 2,933,089
---------- ----------
Property, Plant and Equipment
Land................................................ 35,113 29,556
Buildings........................................... 271,580 198,396
Machinery and equipment............................. 569,428 516,766
Capitalized leases.................................. 23,271 24,625
Leasehold improvements.............................. 98,400 85,467
---------- ----------
997,792 854,810
Less: accumulated depreciation...................... 422,020 377,990
---------- ----------
575,772 476,820
Tools, dies and molds, net.......................... 187,349 163,809
---------- ----------
Property, plant and equipment, net.................. 763,121 640,629
---------- ----------
Other Noncurrent Assets
Intangibles, net.................................. 1,484,634 684,779
Other assets...................................... 264,324 254,346
---------- ----------
$5,147,385 $4,512,843
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Short-term borrowings............................... $ 199,006 $ 52,618
Current portion of long-term liabilities............ 33,666 24,376
Accounts payable.................................... 362,467 411,162
Accrued liabilities................................. 748,837 702,725
Income taxes payable................................ 299,058 277,902
---------- ----------
Total current liabilities........................ 1,643,034 1,468,783
---------- ----------
Long-Term Liabilities
6-3/4% senior notes, due 2000....................... 100,000 100,000
5-1/2% senior notes, due 2000....................... 200,955 293,650
6% senior notes, due 2003........................... 150,000 --
6-1/8% senior notes, due 2005....................... 150,000 --
Medium-term notes................................... 540,500 520,500
Mortgage note....................................... 43,007 43,573
Other............................................... 149,086 152,999
---------- ----------
Total long-term liabilities...................... 1,333,548 1,110,722
---------- ----------
Stockholders' Equity
Preferred stock, Series A $0.01 par value
$200.00 liquidation preference per share,
750.0 thousand shares authorized, issued and
outstanding........................................ 8 8
Preferred stock, Series C $1.00 par value, $125.00
liquidation preference per share, 772.8 thousand
shares authorized; 771.9 thousand shares issued and
outstanding........................................ 772 772
Special voting preferred stock $1.00 par value,
$10.00 liquidation preference per share, one share
authorized, issued and outstanding, representing
the voting rights of 5.2 million and 1.5 million
outstanding exchangeable shares in 1998 and 1997,
respectively....................................... -- --
Common stock $1.00 par value, 1.0 billion shares
authorized; 405.1 million shares and 379.0 million
shares issued in 1998 and 1997, respectively....... 405,114 379,011
Additional paid-in capital.......................... 1,845,222 1,497,461
Deferred compensation............................... (12,265) --
Treasury stock at cost; 14.3 million shares and 8.8
million shares in 1998 and 1997, respectively...... (495,347) (285,420)
Retained earnings................................... 625,197 551,972
Accumulated other comprehensive loss................ (197,898) (210,466)
---------- ----------
Total stockholders' equity....................... 2,170,803 1,933,338
---------- ----------
$5,147,385 $4,512,843
========== ==========
Commitments and Contingencies (See accompanying
notes.)
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with The Learning
Company, Inc. ("Learning Company"), accounted for as a pooling of interests.
See Note 12.
F-3
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year
----------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands, except per share
amounts)
<S> <C> <C> <C>
Net Sales................................. $5,621,207 $5,455,547 $5,064,860
Cost of sales............................. 2,707,904 2,635,887 2,474,782
---------- ---------- ----------
Gross Profit.............................. 2,913,303 2,819,660 2,590,078
Advertising and promotion expenses........ 917,665 846,448 814,062
Other selling and administrative
expenses................................. 1,144,801 1,013,091 934,427
Amortization of intangibles............... 129,689 487,199 467,009
Restructuring and other charges........... 157,314 343,606 12,312
Charge for incomplete technology.......... 56,826 20,300 56,688
Interest expense.......................... 128,468 112,612 126,929
Other income, net......................... (13,092) (4,812) (10,247)
---------- ---------- ----------
Income Before Income Taxes and
Extraordinary Item....................... 391,632 1,216 188,898
Provision for income taxes................ 185,579 179,327 166,936
---------- ---------- ----------
Income (Loss) Before Extraordinary Item... 206,053 (178,111) 21,962
Extraordinary item--loss on early
retirement of debt....................... -- (4,610) --
---------- ---------- ----------
Net Income (Loss)......................... 206,053 (182,721) 21,962
Preferred stock dividend requirements..... 7,960 10,505 7,391
---------- ---------- ----------
Net Income (Loss) Applicable to Common
Shares................................... $ 198,093 $ (193,226) $ 14,571
========== ========== ==========
Basic Income (Loss) Per Common Share
Income (loss) before extraordinary
item................................... $ 0.51 $ (0.51) $ 0.04
Extraordinary item--loss on early
retirement of debt..................... -- (0.01) --
---------- ---------- ----------
Net income (loss)......................... $ 0.51 $ (0.52) $ 0.04
========== ========== ==========
Weighted average number of common shares.. 390,210 369,870 359,209
========== ========== ==========
Diluted Income (Loss) Per Common Share
Income (loss) before extraordinary
item................................... $ 0.47 $ (0.51) $ 0.04
Extraordinary item--loss on early
retirement of debt..................... -- (0.01) --
---------- ---------- ----------
Net income (loss)......................... $ 0.47 $ (0.52) $ 0.04
========== ========== ==========
Weighted average number of common and
common equivalent shares................. 421,707 369,870 368,197
========== ========== ==========
Dividends Declared Per Common Share....... $ 0.31 $ 0.27 $ 0.24
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 12.
Consolidated results for 1997 and 1996 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 7.
F-4
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year
----------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 206,053 $(182,721) $ 21,962
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Noncash restructuring and integration charges 32,380 115,559 -
Depreciation 179,135 164,060 153,967
Amortization 133,549 489,937 471,191
Charge for incomplete technology 56,826 32,467 64,697
Loss on early retirement of debt, net of tax - 4,610 -
Increase (decrease) from changes in assets and liabilities:
Accounts receivable 141,583 (247,406) (122,725)
Inventories (61,508) (48,923) (35,550)
Prepaid expenses and other current assets (87) (100,296) 2,467
Accounts payable, accrued liabilities and income taxes payable (104,275) 253,729 42,199
Deferred income taxes (999) 64,015 (2,147)
Other, net 14,719 (12,554) 5,754
----------- --------- ---------
Net cash flows from operating activities 597,376 532,477 601,815
----------- --------- ---------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (114,387) (96,006) (108,641)
Purchases of other property, plant and equipment (162,132) (136,439) (131,400)
Payment for acquisitions, net of cash acquired (938,647) (115,231) (8,127)
Proceeds from sale of business and other property, plant and equipment 18,667 31,484 6,250
Payments to stockholders of The Former Learning Company - - (25,025)
Investment in other long-term assets (10,783) (7,816) (25,114)
Software development costs (26,786) (27,299) (12,344)
Sales (purchases) of short-term investments 19,954 (43,428) (387)
Other, net (1,484) 566 317
----------- --------- ---------
Net cash flows used for investing activities (1,215,598) (394,169) (304,471)
----------- --------- ---------
Cash Flows From Financing Activities:
Short-term borrowings, net 131,810 3,193 (20,652)
Proceeds from issuance of notes 350,000 310,000 -
Proceeds from issuance of special warrants 134,346 57,462 -
Payments of long-term debt (106,421) (265,499) (58,773)
Exercise of stock options including related tax benefit 170,233 72,290 131,195
Purchase of treasury stock (351,093) (242,505) (273,204)
Sale of treasury stock - 71,248 -
Issuance of preferred stock - (10,701) 92,702
Payment of dividends on common and preferred stock (97,970) (84,537) (66,473)
Other, net (6,968) (1,083) (4,219)
----------- --------- ---------
Net cash flows from (used) for financing activities 223,937 (90,132) (199,424)
----------- --------- ---------
Effect of Exchange Rate Changes on Cash (1,525) (17,195) (2,127)
----------- --------- ---------
(Decrease) Increase in Cash (395,810) 30,981 95,793
Cash at Beginning of Year 798,581 769,390 673,597
Effect of Broderbund's excluded results 1,074 (1,790) -
----------- --------- ---------
Cash at End of Year 403,845 798,581 769,390
Short-term Investments 65,368 85,322 41,894
----------- --------- ---------
Cash and Short-term Investments at End of Year $ 469,213 $ 883,903 $ 811,284
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 12.
Consolidated results for 1997 and 1996 have been restated retroactively for the
effects of the March 1997 merger with Tyco, accounted for as a pooling of
interests. See Note 7.
F-5
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-In Treasury Deferred Retained Comprehensive
Stock Stock Capital Stock Compensation Earnings Income (Loss)
--------- -------- ---------- --------- ------------ --------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995
As previously reported.. $ 52 $296,080 $ 432,150 $ (75,574) $ -- $ 994,645 $ (95,673)
Pooling of interests
with Learning Company.. 56,232 411,473 (123,367) (9,470)
Comprehensive income:
Net income............. 21,962
Unrealized (loss) on
securities............ (276)
Currency translation
adjustments........... 7,411
---- -------- ---------- --------- --------- --------- ---------
Comprehensive income.... 21,962 7,135
Purchase of treasury
stock.................. (96) (3,337) (269,771)
Shares issued for
acquisitions........... 12,136 243,882
Exercise of stock
options................ 3,994 74,624
Issuance of treasury
stock.................. (53,554) 124,315
Conversion of
exchangeable shares.... 54 (54)
Conversion of other
debt................... 190 2,863
Shares issued for
settlement of
expenses............... 600 12,420
Issuance of stock
warrant................ 26,444
Issuance of preferred
stock.................. 773 91,929
Exercise of stock
subscription warrants.. (9,507) 11,658
Nonvested stock
activity............... 2,770 (6,627)
Dividends declared on
common stock........... (65,825)
Dividends declared on
preferred stock........ 2 1,650 (7,391)
---- -------- ---------- --------- --------- --------- ---------
Balance, December 31,
1996................... 827 369,190 1,233,753 (215,999) -- 820,024 (98,008)
Comprehensive (loss):
Net (loss)............. (182,721)
Unrealized gain on
securities............ 719
Currency translation
adjustments........... (113,177)
---- -------- ---------- --------- --------- --------- ---------
Comprehensive (loss).... (182,721) (112,458)
Net income of Broderbund
for the three months
ended November 30, 1996
not included in results
of operations.......... 8,895
Purchase of treasury
stock.................. (480) (14,094) (227,932)
Issuance of treasury
stock.................. (45,486) 158,511
Exercise of stock
options................ 2,135 36,655
Shares issued for
acquisitions........... 4,362 13,591 (6,193)
Issuance of Learning
Company Series A
Preferred Stock........ 8 202,025
Issuance of Softkey
warrants............... 57,462
Conversion of 7% Notes.. 893 15,141
Conversion of preferred
stock.................. (55) 2,761 (2,706)
Conversion of
exchangeable shares.... 88 (88)
Shares issued under
employee stock purchase
plan................... 62 1,208
Dividends declared on
common stock........... (77,528)
Dividends declared on
preferred stock........ (10,505)
---- -------- --------- --------- --------- --------- ---------
Balance, December 31,
1997................... 780 379,011 1,497,461 (285,420) -- 551,972 (210,466)
Comprehensive income:
Net income............. 206,053
Unrealized gain on
securities............ 10,249
Currency translation
adjustments........... 2,319
---- -------- --------- --------- --------- --------- ---------
Comprehensive income.... 206,053 12,568
Net income of Broderbund
for the month ended
December 31, 1997 not
included in results of
operations............. 209
Purchase of treasury
stock.................. (351,393)
Issuance of treasury
stock.................. (65,210) 141,466
Exercise of stock
options................ 4,682 76,749
Shares issued for
acquisitions........... 5,503 111,011 (34,646)
Issuance of Softkey
warrants............... 134,346
Conversion of
exchangeable shares.... 10,900 (10,900)
Conversion of 5-1/2%
Notes.................. 4,122 88,880
Issuance of nonvested
stock.................. 840 12,071 (12,265)
Shares issued under
employee stock purchase
plan................... 56 814
Dividends declared on
common stock........... (90,431)
Dividends declared on
preferred stock........ (7,960)
---- -------- --------- --------- --------- --------- ---------
Balance, December 31,
1998................... $780 $405,114 $1,845,222 $(495,347) $ (12,265) $ 625,197 $(197,898)
==== ======== ========= ========= ========= ========= =========
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balance, December 31,
1995
As previously reported.. $1,551,680
Pooling of interests
with Learning Company.. 334,868
Comprehensive income:
Net income............. 21,962
Unrealized (loss) on
securities............ (276)
Currency translation
adjustments........... 7,411
----------
Comprehensive income.... 29,097
Purchase of treasury
stock.................. (273,204)
Shares issued for
acquisitions........... 256,018
Exercise of stock
options................ 78,618
Issuance of treasury
stock.................. 70,761
Conversion of
exchangeable shares.... --
Conversion of other
debt................... 3,053
Shares issued for
settlement of
expenses............... 13,020
Issuance of stock
warrant................ 26,444
Issuance of preferred
stock.................. 92,702
Exercise of stock
subscription warrants.. 2,151
Nonvested stock
activity............... (3,857)
Dividends declared on
common stock........... (65,825)
Dividends declared on
preferred stock........ (5,739)
----------
Balance, December 31,
1996................... 2,109,787
Comprehensive (loss):
Net (loss)............. (182,721)
Unrealized gain on
securities............ 719
Currency translation
adjustments........... (113,177)
----------
Comprehensive (loss).... (295,179)
Net income of Broderbund
for the three months
ended November 30, 1996
not included in results
of operations.......... 8,895
Purchase of treasury
stock.................. (242,506)
Issuance of treasury
stock.................. 113,025
Exercise of stock
options................ 38,790
Shares issued for
acquisitions........... 11,760
Issuance of Learning
Company Series A
Preferred Stock........ 202,033
Issuance of Softkey
warrants............... 57,462
Conversion of 7% Notes.. 16,034
Conversion of preferred
stock.................. --
Conversion of
exchangeable shares.... --
Shares issued under
employee stock purchase
plan................... 1,270
Dividends declared on
common stock........... (77,528)
Dividends declared on
preferred stock........ (10,505)
----------
Balance, December 31,
1997................... 1,933,338
Comprehensive income:
Net income............. 206,053
Unrealized gain on
securities............ 10,249
Currency translation
adjustments........... 2,319
----------
Comprehensive income.... 218,621
Net income of Broderbund
for the month ended
December 31, 1997 not
included in results of
operations............. 209
Purchase of treasury
stock.................. (351,393)
Issuance of treasury
stock.................. 76,256
Exercise of stock
options................ 81,431
Shares issued for
acquisitions........... 81,868
Issuance of Softkey
warrants............... 134,346
Conversion of
exchangeable shares.... --
Conversion of 5-1/2%
Notes.................. 93,002
Issuance of nonvested
stock.................. 646
Shares issued under
employee stock purchase
plan................... 870
Dividends declared on
common stock........... (90,431)
Dividends declared on
preferred stock........ (7,960)
----------
Balance, December 31,
1998................... $2,170,803
==========
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests. See Note 12.
Consolidated results for December 31, 1995 and 1996 have been restated
retroactively for the effects of the March 1997 merger with Tyco, accounted for
as a pooling of interests. See Note 7.
F-6
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Preparation
The supplementary consolidated financial statements include the accounts of
Mattel, Inc. and its subsidiaries ("Mattel" or the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation,
and certain amounts in the financial statements for prior years have been
reclassified to conform with the current year presentation. Investments in
joint ventures and other companies are accounted for by the equity method or
cost basis depending upon the level of the investment and/or the Company's
ability to exercise influence over operating and financial policies. Financial
data for all periods presented reflect the retroactive effect of the merger,
accounted for as a pooling of interests, with The Learning Company, Inc.
consummated in May 1999 (see Note 12). Financial data for 1997 and 1996 reflect
the retroactive effect of the merger, accounted for as a pooling of interests,
with Tyco Toys, Inc. consummated in March 1997 (see Note 7).
Preparation of the supplementary consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into US dollars at
fiscal year-end exchange rates. Income, expense and cash flow items are
translated at weighted average exchange rates prevailing during the fiscal year.
The resulting currency translation adjustments are recorded as a component of
other comprehensive income or loss within stockholders' equity.
Cash and Short-Term Investments
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 investments in private and
publicly-traded securities, are stated at market value and classified as
securities available-for-sale. Unrealized gains or losses are reported as a
component of other comprehensive income or loss within stockholders' equity
until realized. Quoted market prices, which approximated cost as of the balance
sheet dates, are reasonable estimates of the portfolio's fair value. These
marketable securities, which had a cost basis of $2.7 million as of December 31,
1998, are shown in the supplementary consolidated balance sheet as part of other
assets. The Company did not have any material marketable securities as of
December 31, 1997.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
estimated useful lives of 10 to 40 years for buildings, 18 months to 10 years
for machinery and equipment, and 10 to 20 years, not to exceed the lease term,
for leasehold improvements. Tools, dies and molds are amortized using the
straight-line method over 18 months to 3 years.
F-7
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangibles and Long-Lived Assets
Intangible assets consist of the excess of purchase price over the fair value of
net assets acquired in purchase acquisitions, and the cost of acquired patents
and trademarks. Intangible assets are amortized using the straight-line method
over periods ranging from 18 months to 40 years. Accumulated amortization was
$229.2 million and $187.0 million as of December 31, 1998 and 1997,
respectively.
The Company periodically reviews the carrying value of its fixed and
intangible assets to identify and assess any impairment by evaluating the
operating performance and future undiscounted cash flows of the underlying
assets.
Revenue Recognition
Net sales of toy products are recognized upon shipment. Accruals for customer
discounts and rebates, and defective returns are recorded as the related
revenues are recognized.
Net sales of software products are recognized upon shipment, provided that
no significant obligations remain outstanding and collection of the receivable
is probable. Costs related to insignificant post shipment obligations are
accrued when revenue is recognized for the sale of the related products.
Allowances for good returns are provided at the time of sale and allowances for
price protection are provided at the time of commitment and are charged against
revenues. The allowances for good returns and doubtful accounts are developed
based on an evaluation of historical and expected sales experience and by
channel of distribution, and are based on information available as of the
reporting date. To the extent the future market, sell-through experience,
customer mix, channels of distribution, product pricing and general economic and
competitive conditions change, the estimated reserves required for returns and
allowances may also change.
Advertising Costs
The Company expenses the costs of media advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits. Direct-
response advertising consists primarily of catalogue production and mailing
costs that are generally amortized within three months from the date catalogues
are mailed. Advertising costs associated with customer benefit programs are
accrued as the related revenues are recognized. Costs related to various end-
user coupon rebate programs are expensed at the time sales are made and are
estimated based on the expected coupon redemption rate on a product-by-product
basis and is adjusted to actual at the end of each reporting period.
Development and Software Costs
Development and software costs are expensed as incurred. Costs for new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. Capitalized software
development costs on a product-by-product basis are amortized using the
straight-line method over the remaining estimated economic life of the product,
which is generally twelve months beginning when the product is launched, which
approximates the ratio that current gross revenues for a product bear to the
total of current and anticipated future gross revenues for that product. As of
December 31, 1998 and 1997, the Company had net capitalized software development
costs of $24.3 million and $13.7 million, respectively, which are included in
the supplementary consolidated balance sheets as part of other current assets.
F-8
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
---------------------------------------
Accordingly, no compensation cost has been recognized in the results of
operations for nonqualified stock options granted under the Company's plans as
such options are granted at not less than the quoted market price of the
Company's common stock on the date of grant.
Income Taxes
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities, applying enacted statutory
tax rates in effect for the year in which the differences are expected to
reverse.
Income and Dividends Per Common Share
Share and per share data for all periods presented in these supplementary
financial statements reflect the retroactive effects of the May 1999 Learning
Company merger. The 1997 and 1996 share and per share data presented in these
supplementary financial statements reflect the retroactive effects of the March
1997 Tyco merger.
In the 1997 fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per Share. Accordingly, data for 1997
------------------
and 1996 have been restated to present basic and diluted income (loss) per
common share.
Basic income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common and
exchangeable shares outstanding during each period. Earnings available to
common stockholders represent reported net income (loss) less preferred stock
dividend requirements.
Diluted income (loss) per common share is computed by dividing diluted
earnings available to common stockholders by the weighted average number of
common, exchangeable and common equivalent shares outstanding during each
period. The calculation of common equivalent shares assumes the exercise of
dilutive stock options and warrants, net of assumed treasury share repurchases
at average market prices, and conversion of dilutive preferred stock and
convertible debt, as applicable. Diluted earnings available to common
stockholders represent earnings available to common stockholders plus preferred
stock dividend requirements and interest savings resulting from the assumed
conversions of dilutive securities.
F-9
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of earnings available to common stockholders and diluted
earnings available to common stockholders and the related weighted average
shares for the years ended December 31 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------
Earnings Shares Earnings Shares Earnings Shares
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item $206,053 $(178,111) $21,962
Extraordinary item loss on early
retirement of debt - (4,610) -
----------- ------------ -----------
Net income (loss) 206,053 (182,721) 21,962
Less: preferred stock dividend
requirements (7,960) (10,505) (7,391)
----------- ------------ -----------
Earnings available to common
stockholders $198,093 390,210 $(193,226) 369,870 $14,571 359,209
Dilutive securities:
Dilutive stock options 8,685 7,895
Warrants 4,812 1,093
Preferred stock - 18,000
-------------------------------------------------------------------
Diluted earnings available to
common stockholders $198,093 421,707 $(193,226) 369,870 $14,571 368,197
===================================================================
</TABLE>
Premium price stock options totaling 18.7 million were excluded from the
calculation of diluted earnings per share in 1998 because they were anti-
dilutive in each quarter and for the full year. Mattel preferred stock and
Mattel and Learning Company convertible debt were excluded from the calculation
of diluted earnings per share in all years because they were anti-dilutive. A
warrant issued in 1996 to purchase 3.0 million shares of the Company's common
stock was excluded from the calculation of diluted earnings per share because it
was anti-dilutive in 1997 and 1996. The dilutive impact of this warrant was
minimal in the first quarter and full year 1998 calculations and was anti-
dilutive in the remaining quarters of 1998.
Foreign Currency Contracts
The Company enters into foreign currency forward exchange and option contracts
primarily as hedges of inventory purchases, sales and other intercompany
transactions denominated in foreign currencies to limit the effect of exchange
rate fluctuations on its results of operations and cash flows. The Company does
not enter into contracts for speculative purposes. Gains and losses related to
firm commitments, which qualify for hedge accounting, are deferred and are
recognized in the results of operations, balance sheet, and statement of cash
flows as part of the underlying transaction. Contracts that do not qualify for
hedge accounting are marked to market with gains and losses recognized in the
results of operations currently. If a derivative previously designated as a
hedge of a foreign currency commitment is terminated prior to the transaction
date of the related commitment, the resultant gain or loss is recognized at the
time of maturity of the original contract as a component of other income, net.
F-10
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Income Taxes
Consolidated pre-tax income (loss) consists of the following (in thousands):
<TABLE>
<CAPTION>
For the Year
------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
US operations................................... $(25,271) $(373,836) $(158,234)
Foreign operations.............................. 416,903 375,052 347,132
-------- --------- ---------
$391,632 $ 1,216 $ 188,898
======== ========= =========
</TABLE>
The provision for current and deferred income taxes consists of the following
(in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current
Federal......................................... $ 61,434 $101,916 $128,950
State........................................... 6,500 24,796 23,070
Foreign......................................... 110,300 82,628 68,707
-------- -------- --------
178,234 209,340 220,727
-------- -------- --------
Deferred
Federal......................................... 18,179 (26,335) (47,466)
State........................................... 2,366 1,587 (2,162)
Foreign......................................... (13,200) (7,962) (4,163)
-------- -------- --------
7,345 (32,710) (53,791)
-------- -------- --------
Provision including extraordinary item............ 185,579 176,630 166,936
Benefit allocated to extraordinary item........... -- 2,697 --
-------- -------- --------
Total provision for income taxes.................. $185,579 $179,327 $166,936
======== ======== ========
</TABLE>
F-11
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes are provided principally for net operating loss
carryforwards, certain reserves, depreciation, employee compensation-related
expenses, acquired technology, 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
------------------
1998 1997
-------- --------
<S> <C> <C>
Operating loss and tax credit carryforwards............. $254,770 $214,909
Sales allowances and inventory reserves................. 122,178 84,134
Deferred compensation................................... 37,022 27,871
Excess of tax basis over book basis..................... 21,917 57,737
Restructuring and integration charges................... 23,030 36,446
Postretirement benefits................................. 12,842 12,645
Acquired technology.. .................................. 6,170 10,991
Other................................................... 42,000 20,651
-------- --------
Gross deferred income tax assets...................... 519,929 465,384
-------- --------
Excess of book basis over tax basis..................... (30,851) (20,460)
Retirement benefits..................................... (15,570) (12,752)
Deferred intangible assets.............................. (20,329) (10,552)
Other................................................... (9,159) (10,816)
-------- --------
Gross deferred income tax liabilities................. (75,909) (54,580)
Deferred income tax asset valuation allowances.......... (175,144) (140,106)
-------- --------
Net deferred income tax assets.......................... $268,876 $270,698
======== ========
</TABLE>
Management considered all available evidence and determined that a valuation
allowance of $175.1 million was required as of December 31, 1998 for certain
tax credit and net operating loss carryforwards that would likely expire prior
to their utilization. However, management feels it is more likely than not
that the Company will generate sufficient taxable income in the appropriate
carryforward periods to realize the benefit of the remaining net deferred tax
assets of $268.9 million.
Differences between the provision for income taxes at the US federal statutory
income tax rate and the provision in the supplementary consolidated statements
of operations were as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Provision at federal statutory rates............. $136,927 $ 426 $ 66,114
Increase (decrease) resulting from:
Losses without income tax benefit.............. 1,821 1,468 835
Foreign earnings taxed at different rates,
including withholding taxes................... (34,221) (40,803) (28,198)
State and local taxes, net of federal benefit.. 5,763 17,149 13,590
Non-deductible amortization, merger and
restructuring charges......................... 65,493 139,363 181,418
Effect of change in valuation allowance........ (8,766) 50,679 (21,667)
Utilization of prior year tax benefits......... -- -- (41,448)
Other.......................................... 18,562 11,045 (3,708)
-------- -------- --------
Total provision for income taxes................. $185,579 $179,327 $166,936
======== ======== ========
</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
F-12
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsidiaries that the Company intends to permanently invest and upon which no
deferred US income taxes have been provided is $1.2 billion at December 31,
1998. The additional US income tax on the unremitted foreign earnings, if
repatriated, would be offset in whole or in part by foreign tax credits.
As of December 31, 1998, the Company has US net operating loss
carryforwards totaling $439.3 million and credit carryforwards of $13.2 million
for federal income tax purposes that were generated by Tyco prior to its March
1997 merger with Mattel, by Universal Matchbox Ltd. and subsidiaries
("Matchbox") prior to its acquisition by Tyco, by Learning Company and its
subsidiaries prior to its May 1999 merger with Mattel, and by Mindscape, Inc.
and its subsidiaries prior to its acquisition by Learning Company. The net
operating loss carryforwards expire during the years 1999 to 2011, while $3.7
million of the tax credits expire during the years 1999 to 2003 with the
remainder having no expiration date. Utilization of these loss and credit
carryforwards are subject to annual limitations, and the Company has established
a valuation allowance for the carryforwards which are not expected to be
utilized. The goodwill recorded in connection with Tyco's 1991 acquisition of
Matchbox and Learning Company's 1998 acquisition of Mindscape, Inc. have been
reduced by the tax effect of the portion of the net operating losses which the
Company expects to utilize.
Certain foreign subsidiaries have net operating loss carryforwards totaling
$150.1 million ($113.4 million with no expiration date, $36.6 million expiring
during the years 1999 to 2003, and $0.1 million expiring after 2003).
Generally accepted accounting principles require that tax benefits related
to the exercise by employees of nonqualified stock options be credited to
additional paid-in capital. In 1998, 1997 and 1996, nonqualified stock options
exercised resulted in credits to additional paid-in capital totaling $38.7
million, $20.2 million and $49.8 million, respectively.
The Internal Revenue Service has completed its examination of the Mattel,
Inc. federal income tax returns through December 31, 1991.
Note 3--Employee Benefits
Mattel and certain of its subsidiaries have retirement plans covering
substantially all employees of these companies. Expense related to these plans
totaled $20.0 million, $19.0 million and $16.2 million in 1998, 1997 and 1996,
respectively. Activity related to Learning Company's benefit plans was not
significant during any year.
F-13
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pension Plans
The Company provides defined benefit pension plans, which satisfy the
requirements of the Employee Retirement Income Security Act of 1974 ("ERISA").
With the exception of the Fisher-Price Pension Plan, activity related to the
Company's pension plans, including those of foreign affiliates, was not
significant during any year.
The components of net pension income for the Fisher-Price Pension Plan,
based upon an October valuation date, for the years ended December 31, 1998,
1997 and 1996 are detailed below (in thousands):
<TABLE>
<CAPTION>
For the Period Ended
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost..................................... $ 2,508 $ 2,594 $ 2,671
Interest cost.................................... 10,929 10,327 8,866
Expected return on plan assets................... (18,949) (16,163) (14,784)
Amortization of:
Unrecognized prior service cost................ 108 134 150
Unrecognized net asset......................... (2,569) (2,569) (2,569)
Plan amendment loss (gain)....................... 1,154 (826) --
-------- -------- --------
Net pension income............................... $ (6,819) $ (6,503) $ (5,666)
======== ======== ========
</TABLE>
Reconciliation of the funded status of Fisher-Price's domestic pension plan
to the related prepaid asset included in the supplementary consolidated
balance sheets is as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
-----------------
1998 1997
------- --------
<S> <C> <C>
Funded status of the plan.................................... $41,335 $ 60,809
Unrecognized net gain........................................ (4,438) (28,271)
Unrecognized prior service cost.............................. 1,366 1,474
Unrecognized net transition asset............................ (1,285) (3,854)
------- --------
Prepaid pension asset........................................ $36,978 $ 30,158
======= ========
</TABLE>
F-14
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliation of the assets and liabilities of Fisher-Price's domestic
pension plan are as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
------------------
1998 1997
-------- --------
<S> <C> <C>
Change in Plan Assets
Plan assets at fair value, beginning of year.............. $202,887 $157,507
Actual return on plan assets.............................. 2,793 51,218
Benefits paid............................................. (7,768) (5,838)
-------- --------
Plan assets at fair value, end of year.................... $197,912 $202,887
======== ========
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year........... $142,078 $131,379
Service cost.............................................. 2,508 2,594
Interest cost............................................. 10,929 10,327
Plan amendments........................................... 1,154 (826)
Actuarial loss............................................ 7,676 4,442
Benefits paid............................................. (7,768) (5,838)
-------- --------
Projected benefit obligation, end of year................. $156,577 $142,078
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the Period
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Assumptions:
Weighted average discount rate............................. 7.50% 7.75% 7.75%
Rate of future compensation increases...................... 4.00% 4.00% 4.00%
Long-term rate of return on plan assets.................... 11.00% 11.00% 11.00%
</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. The Company also maintains unfunded supplemental executive
retirement plans which are nonqualified defined benefit plans covering certain
key executives. For 1998, 1997 and 1996, the accumulated and vested benefit
obligations and related expense of these plans were not significant.
Deferred Compensation and Excess Benefit Plans
The Company provides a deferred compensation plan which permits certain
officers and key employees to elect to defer portions of their compensation.
The deferred compensation plan, together with certain Company and employee
contributions made to an excess benefit plan, earn various rates of return.
The liability for these plans as of December 31, 1998 and 1997 was $47.8
million and $39.2 million, respectively. The Company's contribution to these
plans and the related administrative expense were not significant to the
results of operations during any year.
In 1996, the Company purchased group trust-owned life insurance contracts
designed to assist in funding these programs. The cash surrender value of
these policies, valued at $40.7 million and $32.9 million as of December 31,
1998 and 1997, respectively, are held in an irrevocable rabbi trust which is
included in other assets in the supplementary consolidated balance sheets.
F-15
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Postretirement Benefits
Fisher-Price has an unfunded postretirement health insurance plan covering
certain eligible domestic employees hired prior to January 1, 1993. Details of
the expense for the Fisher-Price plan recognized in the supplementary
consolidated statements of operations for the years ended December 31, 1998,
1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
--------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service cost.............................................. $ 218 $ 284 $ 344
Interest cost............................................. 2,416 2,465 2,496
------ ------ ------
Net postretirement benefit cost........................... $2,634 $2,749 $2,840
====== ====== ======
</TABLE>
Amounts included in the Company's supplementary consolidated balance sheets
for this plan are as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
----------------
1998 1997
------- -------
<S> <C> <C>
Current retirees.............................................. $25,140 $23,846
Fully eligible active employees............................... 4,222 4,640
Other active employees........................................ 4,239 4,829
------- -------
Accumulated postretirement benefit obligation................. 33,601 33,315
Unrecognized net loss......................................... (1,716) (1,213)
------- -------
Accrued postretirement benefit liability...................... $31,885 $32,102
======= =======
</TABLE>
Reconciliation of the liabilities of Fisher-Price's postretirement health
insurance plan are as follows (in thousands):
<TABLE>
<CAPTION>
As of Year End
----------------
1998 1997
------- -------
<S> <C> <C>
Change in Accumulated Postretirement Benefit Obligation
Accumulated postretirement benefit obligation, beginning of
year...................................................... $33,315 $33,182
Service cost............................................... 218 284
Interest cost.............................................. 2,416 2,465
Actuarial loss (gain)...................................... 503 (383)
Benefits paid, net of participant contributions............ (2,851) (2,233)
------- -------
Accumulated postretirement benefit obligation, end of
year...................................................... $33,601 $33,315
======= =======
</TABLE>
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.50% for 1998 and 7.75% for 1997 and 1996. For all
participants, the health care cost trend rate for expected claim costs was
assumed to be 5.50% in 1998 and remaining constant thereafter. A one
percentage point increase or decrease in the assumed health care cost trend
rate for each future year would have the following effect on the accumulated
postretirement benefit obligation and the service and interest cost recognized
as of and for the year ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
One Percentage Point
---------------------
Increase Decrease
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation........... $ 3,531 $ (3,009)
Service and interest cost............................... 256 (218)
</TABLE>
F-16
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also maintains a contributory postretirement benefit plan for
domestic employees of Mattel. The ongoing costs and obligations associated
with the Mattel, Inc. plan are not significant to the Company's financial
position and results of operations during any year.
Incentive Awards
The Company's Long-Term Incentive Plan is a three-year plan available to
certain key executives of Mattel, Inc. Interim awards are paid annually based
upon the financial performance of the Company over a three-year period.
Amounts charged to operating expense in 1998, 1997 and 1996 under the current
plan were $10.8 million, $13.8 million and $3.9 million, respectively.
The Company also has annual incentive compensation plans for officers and
key employees based on the Company's performance and subject to certain
approvals of the Compensation/Options Committee of the board of directors. For
the years ended December 31, 1998, 1997 and 1996, $11.7 million, $23.2 million
and $12.9 million, respectively, were charged to operating expense for awards
under the Mattel plans and $10.0 million, in 1996, for Tyco.
Prior to the March 1997 merger, Tyco had a Long-Term Incentive Plan for
certain senior executives, under which Tyco awarded Restricted Stock Units
("RSU"). The aggregate fair market value of the RSUs was being amortized to
compensation expense by Tyco over the restriction period. At the time of the
1997 merger, the RSUs were converted into approximately 244 thousand shares of
Mattel common stock which approximated the fair value of the RSUs on the
merger consummation date and the remaining unamortized amount of $5.1 million
was charged to operating expense in 1999.
Prior to the May 1999 merger, Learning Company maintained the 1990 Long-Term
Equity Incentive Plan for certain senior executives. Under this plan, 0.8
million shares of nonvested stock were issued during 1998. The aggregate fair
market value of the nonvested stock was being amortized to compensation
expense over the restriction period. At the time of the 1999 merger, the
nonvested stock became fully vested as a result of change of control
provisions and the remaining unamortized amount of $12.3 million will be
charged to operating expense in 1999.
Note 4--Seasonal Financing and Long-Term Debt
Seasonal Financing
The Company maintains and periodically amends or replaces an unsecured
committed revolving credit agreement with a commercial bank group that is used
as the primary source of financing the seasonal working capital requirements
of its domestic and certain foreign affiliates. The agreement in effect during
1998 consisted of a committed unsecured facility providing a total of $1.0
billion in seasonal financing. Within the facility, up to $700.0 million was a
standard revolving credit line available for advances and backup for
commercial paper issuances (a five-year facility that expires in 2003).
Interest was charged at various rates selected by the Company, ranging from
market commercial paper rates to the bank reference rate. The remaining $300.0
million (a five-year facility that expires in 2003) was available for
nonrecourse purchases of certain trade accounts receivable of the Company by
the commercial bank group providing the credit line. The agreement required
the Company to meet financial covenants for consolidated debt-to-capital and
interest coverage and the Company was in compliance with such covenants during
1998. This agreement will continue to be in effect during 1999. In addition,
the Company avails itself of uncommitted domestic facilities provided by
certain banks to issue short-term money market loans.
To meet seasonal borrowing requirements of certain foreign affiliates, the
Company negotiates individual financing arrangements, generally with the same
group of banks that provided credit in the prior year. Foreign
F-17
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
credit lines total approximately $370 million, a portion of which is used to
support letters of credit. The Company expects to extend these credit lines
throughout year 2000 and believes available amounts will be adequate to meet
its seasonal financing requirements. The Company also enters into agreements
with banks of its foreign affiliates for nonrecourse sales of certain of its
foreign subsidiary receivables.
TLC Multimedia Inc., a wholly-owned subsidiary of Learning Company, had a
revolving line of credit which provided for a maximum availability of $147.5
million, of which $40.0 million was outstanding as of December 31, 1998.
Borrowings under the revolving line of credit become due on July 1, 2000 and
bear interest at LIBOR plus .75% (6.4% at December 31, 1998). The revolving
line of credit required Learning Company to meet certain financial covenants,
was secured by a general interest in the assets of Learning Company and certain
of its subsidiaries, and by a pledge of stock of certain Learning Company
subsidiaries. The revolving line of credit was guaranteed by Learning Company.
Upon consummation of the May 1999 merger, all outstanding borrowings under the
revolving line of credit were repaid and the agreement was terminated by
Mattel.
Additionally, Learning Company, through its wholly-owned subsidiary The
Learning Company Funding, Inc. (a separate special purpose corporation), was
party to a receivables purchase agreement for nonrecourse sales of certain
trade accounts receivable of up to $100.0 million on a revolving basis during
a five year period ending September 30, 2002, of which $75.0 million and $65.0
million was utilized as of December 31, 1998 and 1997, respectively. In
addition, Learning Company had a European accounts receivable facility for
sales with recourse of certain European trade accounts receivable of up to
$25.0 million, which was fully utilized as of December 31, 1998. Upon
consummation of the May 1999 merger, all outstanding borrowings under the
European accounts receivable facility were repaid and both the domestic and
European accounts receivable facilities were terminated by Mattel.
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 the Company's domestic and foreign credit lines and other short-term
borrowings is summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
------------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Balance at end of year
Domestic................................. $ 119,175 $ 35,150 $ 25,000
Foreign.................................. 79,831 17,468 28,924
Maximum amount outstanding
Domestic................................. $1,076,600 $558,000 $567,000
Foreign.................................. 141,000 67,000 113,000
Average borrowing
Domestic................................. $ 400,800 $178,000 $215,000
Foreign.................................. 58,000 40,000 72,000
Weighted average interest rate on average
borrowing
Domestic (computed daily)................ 5.6% 5.7% 6.6%
Foreign (computed monthly)............... 20.3% 11.9% 11.6%
</TABLE>
6-3/4% Senior Notes
In May 1993, the Company issued $100.0 million aggregate principal amount of
6-3/4% Senior Notes maturing May 15, 2000. Interest is payable semiannually on
the fifteenth day of May and November. At December 31, 1998 and 1997, the bid
prices for the 6-3/4% Senior Notes, as provided by one of the underwriters,
were $1,014.00 and $1,011.85, respectively, based on a par value of $1,000.00.
F-18
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5 1/2% Senior Convertible Notes ("5 1/2% Notes")
In October 1995, Learning Company issued $350.0 million aggregate principal
amount of 5 1/2% Notes maturing November 1, 2000. Interest is payable
semiannually on the first day of May and November. The 5 1/2% Notes are
convertible at the option of the holders into common stock at $53.00 per share.
The terms of the 5 1/2% Notes provide for early redemption at the option of the
issuer, in whole or in part, at any time on or after November 2, 1998 at
redemption prices equal to 102.2% of the principal amount reducing annually to
100% by November 1, 2000. During the years ended December 31, 1998, 1997 and
1996, Learning Company repurchased $6.0 million, $28.0 million and $18.4
million, respectively, of 5 1/2% Notes. In June 1998, Learning Company
repurchased $96.7 million of 5 1/2% Notes in exchange for issuance of 4.1
million shares of common stock. At December 31, 1998 and 1997, the bid prices
for the 5 1/2% Notes, as provided by one of the underwriters, were $985.00 and
$910.00, respectively, based on a par value of $1,000.00.
The Company assumed Learning Company's obligations related to the 5 1/2% Notes
upon consummation of the May 1999 merger. As a result, the 5 1/2% Notes are now
convertible at the option of the holders into a number of shares of Mattel
common stock determined by dividing the principal amount of the notes to be
converted by the $53.00 conversion price and multiplying the resulting number by
1.2.
In December 1995, Tribune Company made an investment in Learning Company in
the form of $150.0 million aggregate principal amount of 5 1/2% Notes. These
notes were sold by Tribune Company during 1997 in a private transaction to an
investor group prior to the issuance by Learning Company of 750.0 thousand
shares of Series A Convertible Participating Preferred Stock ("Series A
Preferred Stock") and were surrendered by the investor group for the shares of
the Series A Preferred Stock.
6% and 6 1/8% Senior Notes
In July 1998, the Company issued $300.0 million aggregate principal amount
of senior notes, $150.0 million of which were 6% Senior Notes maturing July
15, 2003 and $150.0 million of which were 6 1/8% Senior Notes maturing July
15, 2005. Interest is payable semiannually on the fifteenth day of January and
July. At December 31, 1998, the bid prices for the 6% and 6 1/8% Senior Notes,
as provided by one of the underwriters, was $1,004.40 and $998.65,
respectively, based on a par value of $1,000.00. The proceeds of these notes
were used to finance the acquisitions of Pleasant Company and Bluebird.
Medium-Term Notes ("MT Notes")
During the 1994 third quarter, the Company commenced a program for the
issuance of debt and equity securities under various shelf registration
statements. In November 1998, the Company filed its current universal shelf
registration statement allowing the issuance of up to $400.0 million of debt
and equity securities, all of which was available to be issued as of December
31, 1998. The following is a summary of MT Notes currently outstanding (in
millions, except bid prices):
<TABLE>
<CAPTION>
Bid Price(b)
Year Maturity ---------------------------------------
Issued Amount Date Rate(a) 1998 1997
------ ------ ----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
1994.... $ 80.5 10/99-12/04 8.00%-8.55% $1,018.75-$1,112.70 $1,031.50-$1,117.80
1995.... 130.0 04/02-05/07 7.01%-7.65% 1,043.20- 1,051.34 1,000.20- 1,062.90
1997.... 310.0 11/04-07/12 6.70%-7.49% 1,021.59- 1,073.45 1,022.58- 1,064.90
1998.... 50.0 11/13 6.50%-6.61% 990.52- 1,000.85 --
</TABLE>
- --------
(a) Interest is payable semiannually at fixed rates on the fifteenth day of
May and November.
(b) Based on a par value of $1,000.00.
F-19
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage Note
In 1990, the Company borrowed $45.0 million under a mortgage agreement
secured by its headquarters office facility in El Segundo, California.
Interest accrues at 10.15% and monthly principal and interest payments are due
through December 2005. The fair value of the original mortgage note, estimated
by discounting future cash flows at interest rates currently available for
debt with the same credit rating, similar terms and maturity date, was
approximately $51 million and $57 million at December 31, 1998 and 1997,
respectively.
7% Convertible Subordinated Notes ("7% Notes")
Upon consummation of the March 1997 merger, the Company assumed Tyco's $16.0
million obligation related to the 7% Notes. On September 10, 1997, the holder
converted all of the 7% Notes into 892.7 thousand shares of Mattel common
stock.
10 1/8% Senior Subordinated Notes ("10 1/8% Notes")
Upon consummation of the March 1997 merger, the Company assumed Tyco's
$126.5 million obligation related to the 10 1/8% Notes. On August 15, 1997,
the Company exercised its option and redeemed the 10 1/8% Notes at 103.797% of
par together with accrued interest. In the third quarter of 1997, the Company
recognized a pre-tax extraordinary loss of $7.3 million, and a related income
tax benefit of $2.7 million, as a result of the early retirement.
6 7/8% Senior Notes
The Company's $100.0 million of 6 7/8% Senior Notes issued in August 1992
were repaid upon maturity on August 1, 1997.
Scheduled Maturities
The aggregate amounts of long-term debt and other obligations maturing in
the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
Senior MT Mortgage
Notes Notes Note Other Total
-------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
1999........................... $ -- $30,000 $600 $3,100 $ 33,700
2000........................... 301,000 -- 600 600 302,200
2001........................... -- 30,500 700 500 31,700
2002........................... -- 30,000 800 200 31,000
2003........................... 150,000 30,000 800 200 181,000
</TABLE>
Note 5--Stockholders' Equity
Preference Stock and Preference Share Purchase Rights
The Company is authorized to issue 20.0 million shares of $0.01 par value
preference stock, of which none is currently outstanding. There are 2.0
million shares of $0.01 par value preference stock designated as Series E
Junior Participating Preference Stock in connection with a distribution of
Preference Share Purchase Rights (the "Rights") to the Company's common
stockholders. The Rights may be exercised by their holders to purchase shares
of the Company's Series E Junior Participating Preference Stock upon the
occurrence of a change of control as defined in the rights agreement. The
Rights will expire on February 17, 2002, unless the agreement is further
extended or the Rights are earlier redeemed or exchanged by the Company.
F-20
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock
The Company is authorized to issue 3.0 million shares of $1.00 par value
preferred stock, of which 771.9 thousand shares were outstanding as of
December 31, 1998 and 1997.
. Series A Preferred Stock
In December 1997, Learning Company issued 750.0 thousand shares of Series A
Preferred Stock to an investor group in exchange for $150.0 million of 5-1/2%
Notes. Each share of Series A Preferred Stock is convertible into 20 shares of
common stock, subject to certain minimum returns on investment. The par value
and liquidation preference of the Series A Preferred Stock are $0.01 and
$200.00 per share, respectively. The Series A Preferred Stock is non-
redeemable, bears no dividend, is subject to restrictions on resale for a
period of at least 18 months, and is mandatorily convertible into common stock
upon satisfaction of certain conditions. Just prior to the consummation of the
May 1999 merger, each share of Series A Preferred Stock was converted into 20
shares of Learning Company common stock, and the resale restrictions expired.
An extraordinary loss of approximately $61 million was recognized upon
conversion of the 5-1/2% Notes into the Series A Preferred Stock due to the
appreciation of the underlying common stock between the date the conversion
agreement was signed and the date the preferred stock was issued. The
resulting income tax benefit related to the extraordinary loss was also
estimated to be approximately $61 million. As a result, the extraordinary
loss, net of tax, was determined to be immaterial and was not disclosed as a
separate item in the supplementary consolidated statement of operations for
the year ended December 31, 1997.
. Series C Mandatorily Convertible Redeemable Preferred Stock ("Series C
Preferred Stock")
On June 28, 1996, Tyco received net proceeds of $92.7 million from the sale
of 772.8 thousand shares of Series C Preferred Stock. Each share of Series C
Preferred Stock was converted into like Mattel preferred stock as a result of
the March 1997 merger. The par value and liquidation preference of the Series
C Preferred Stock are $1.00 and $125.00 per share, respectively. Dividends are
cumulative and payable in cash on the first day of each calendar quarter at
the rate of $10.3125 per annum. Series C Depositary Shares ("Depositary
Shares"), each representing one twenty-fifth of a share of Series C Preferred
Stock, totaling 19.3 million shares, were sold by the depositary as part of
the above offering at an issue price of $5.00 per share. Each Depositary Share
was converted into a like Mattel depositary share as a result of the March
1997 merger.
Shares of the Series C Preferred Stock (and the related Depositary Shares)
are convertible, at the option of the holders, at any time prior to July 1,
2000 into Mattel common stock at a rate of 0.40064 common shares for each
Depositary Share, subject to adjustment under certain conditions. The Company,
at its option, may redeem the Series C Preferred Stock (and the related
Depositary Shares) at any time on or after July 1, 1999 for a number of Mattel
common shares equal to the call price (which is initially set at $5.103 per
Depositary Share and declines at specified times to $5.000 per Depositary
Share as of June 30, 2000) divided by the current market price of Mattel
common stock (as defined in the Certificate of Designations) or 0.40064 common
shares for each Depositary Share, whichever is greater. On July 1, 2000,
shares of the Series C Preferred Stock (and the related Depositary Shares) are
mandatorily convertible into 0.54301 Mattel common shares for each Depositary
Share.
The Series C Preferred Stock entitles the holders of Depositary Shares to
vote (at the rate of 0.48876 common shares for each Depositary Share) with the
holders of the Company's common stock as a single class on all matters on
which the holders of the Company's common stock may vote.
. Series B Voting Convertible Exchangeable Preferred Stock ("Series B
Preferred Stock")
During 1994, Tyco sold 47.6 thousand shares of Series B Preferred Stock to a
private investment group. Each share of Series B Preferred Stock was converted
into like Mattel preferred stock as a result of the March
F-21
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 merger. Until April 15, 1996, Tyco paid dividends in the form of
additional shares of Series B Preferred Stock. Dividends issued in shares in
lieu of cash during 1996 were valued at $1.7 million (or 1.6 thousand shares).
On December 2, 1997, all outstanding shares of Series B Preferred Stock were
converted by the holders into 2.8 million shares of Mattel common stock.
Special Voting Preferred Stock
The Company is authorized to issue one share of $1.00 par value Special
Voting Preferred Stock, which was issued in exchange for one share of Learning
Company special voting stock in connection with the May 1999 merger. The par
value and liquidation preference of the Special Voting Preferred Stock are
$1.00 and $10.00 per share, respectively. The Special Voting Preferred Stock
has a number of votes equal to the number of outstanding exchangeable shares
which are not owned by the Company, its subsidiaries or any entity controlled
by the Company. The Special Voting Preferred Stock votes together with the
holders of the Company's common stock and Series C Preferred Stock as a single
class on all matters on which the holders of the Company's common stock and
Series C Preferred Stock may vote. No dividends are paid on the Special Voting
Preferred Stock. The Special Voting Preferred Stock will be redeemed for
$10.00 on February 4, 2005, the redemption date for the exchangeable shares,
unless the board of directors of the Company's subsidiary, Softkey Software
Products Inc., extends or accelerates the redemption date.
Common Stock
In May 1998, the stockholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation that increased the number of
shares of authorized common stock from 600.0 million to 1.0 billion in order
to accommodate issuance of common stock in connection with possible future
mergers and other financing transactions, future stock dividends or splits,
future awards pursuant to the Company's stock option plans, warrant exercises,
and other general corporate purposes.
Exchangeable Shares and Related Softkey Warrants
As of December 31, 1998 and 1997, there were 5.2 million and 1.5 million
outstanding exchangeable shares, respectively, which were not owned by
Learning Company, its subsidiaries or any entity controlled by Learning
Company. As a result of the May 1999 merger, each exchangeable share is
convertible at the option of the holder, without additional payment, for the
right to receive 1.2 shares of Mattel common stock until February 4, 2005. On
that date, any exchangeable shares not previously converted will be redeemed
at the current market price of the Company's common stock multiplied by 1.2.
The redemption price will be paid in the form of the Company's common stock,
plus cash equal to any unpaid dividends. The board of directors of the
Company's subsidiary, Softkey Software Products Inc., may extend the automatic
redemption date at its option and may accelerate the automatic redemption date
if the number of outstanding exchangeable shares is less than 0.5 million.
Holders of exchangeable shares are entitled to receive dividends declared on
the Company's common stock multiplied by 1.2 as if the exchangeable shares had
been converted into common stock. Holders of exchangeable shares vote their
shares through the Special Voting Preferred Stock at the rate of 1.2 votes per
exchangeable share on all matters on which the holders of the Company's common
stock and Series C Preferred Stock may vote. As a result of the 1999 merger,
each exchangeable share will include the right to acquire exchangeable shares
under a rights agreement issued by Softkey Software Products Inc. These rights
have an economically equivalent value to the Rights attached to the Company's
common stock.
During the years ended December 31, 1998, 1997 and 1996, 9.1 million, 0.1
million and 0.1 million exchangeable shares, respectively, were converted by the
holders into common stock at the rate of 1.2 common shares per exchangeable
share.
F-22
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1997 and March 1998, the Company's Canadian subsidiary, Softkey
Software Products Inc., issued 4.1 million and 8.7 million warrants in private
placements in Canada for net proceeds of $57.5 million and $134.3 million,
respectively. Each warrant was subsequently exchanged in accordance with its
provisions into one exchangeable share without additional payment in February
1998 and July 1998. As of December 31, 1998, no Softkey warrants were
outstanding.
Stock Compensation Plans
.Mattel Stock Option Plans
In May 1996, the stockholders of the Company approved the Mattel 1996 Stock
Option Plan. Under this plan, incentive stock options, nonqualified stock
options, stock appreciation rights, nonvested stock awards, and shares of
common stock may be granted to officers, key employees, and other persons
providing services to the Company. In addition, nonqualified stock options may
be granted to members of the Company's board of directors who are not
employees of the Company.
Generally, options are exercisable contingent upon the grantees' continued
employment with the Company. Nonqualified stock options are granted at not
less than 100% of the fair market value of the Company's common stock on the
date of grant, generally vest at the rate of 25% per year of service, and
usually expire within ten years from the date of grant. The 1996 Stock Option
Plan provides that up to 1.5% of Mattel's outstanding common stock as of the
first day of each calendar year will be available for awards under the plan.
Grants made to individual participants cannot exceed 1.0 million shares in any
single calendar year. On February 4, 1999, the Company's board of directors
approved an amendment to the 1996 Stock Option Plan authorizing an additional
6.0 million shares for grant in connection with new employees of businesses
acquired by the Company. The aggregate number of shares of common stock
available for grants under the 1996 Stock Option Plan may not exceed 50.0
million shares. This plan expires on December 31, 2005. The Company's previous
plans, the 1982 and 1990 Stock Option Plans, expired on April 14, 1992 and
December 31, 1996, respectively. All outstanding awards under these plans
continue to be exercisable under the terms of their respective grant
agreements.
The fair value of Mattel options granted during 1998, 1997 and 1996 has been
estimated using the Black-Scholes pricing model. The expected life of these
options used in this calculation has been determined using historical exercise
patterns. The following weighted average assumptions were used in determining
fair value:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Expected life (in years)................................ 3.60 3.40 3.17
Risk-free interest rate................................. 4.61% 5.69% 6.05%
Volatility factor....................................... 15.80% 17.40% 17.98%
Dividend yield.......................................... 0.83% 0.86% 0.82%
</TABLE>
The weighted average fair value of Mattel options granted during 1998, 1997
and 1996 were $7.32, $4.86 and $5.12, respectively.
F-23
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
1998 1997 1996
-------------- -------------- --------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1...... 17,307 $21.73 13,310 $18.05 14,513 $14.27
Options granted............... 3,680 41.66 7,443 25.79 4,294 25.15
Options exercised............. (4,284) 17.80 (2,807) 14.89 (5,267) 13.48
Options canceled.............. (628) 29.79 (639) 22.44 (230) 16.67
------ ------ ------
Outstanding at December 31.... 16,075 $27.02 17,307 $21.73 13,310 $18.05
====== ====== ======
Exercisable at December 31.... 5,645 $20.48 5,999 $16.29 5,263 $14.41
====== ====== ======
Available for grant at
December 31.................. 2,358 1,072 4,074
====== ====== ======
</TABLE>
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
for Mattel stock options outstanding as of December 31, 1998 (options in
thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------- -------------
Exercise Price Remaining
Ranges Number Life Price Number Price
-------------- ------ --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
$4.69 to $15.76........................ 1,775 4.87 $14.50 1,775 $14.50
16.16 to 24.00......................... 2,212 6.59 18.96 1,263 17.98
24.70 to 25.50......................... 2,199 7.08 24.72 806 24.73
25.75 to 25.75......................... 5,372 8.10 25.75 1,311 25.75
26.13 to 41.38......................... 1,400 8.23 30.76 490 27.55
42.00 to 42.00......................... 3,117 9.10 42.00 -- --
------ -----
$4.69 to $42.00........................ 16,075 7.60 $27.02 5,645 $20.48
====== =====
</TABLE>
Prior to the March 1997 merger, Tyco had various incentive and non-qualified
stock option plans that provided benefits for eligible participants. Effective
with the 1997 merger, all stock options previously granted and outstanding
under these plans were exchanged for approximately 363 thousand Mattel common
shares (which approximated the fair value of the options as of the merger
consummation date).
In December 1993, restricted stock awards totaling 927.7 thousand shares
were granted to key Mattel executives. During 1996, 244.1 thousand shares were
forfeited and returned to the Company. On January 1, 1997, restrictions on the
remaining 683.6 thousand shares lapsed. Compensation expense of $2.8 million
was charged to operating expense in 1996. In addition, as a result of the
forfeiture, $6.6 million of compensation expense that was recognized in
previous periods was reversed in 1996.
.Mattel 1997 Premium Price Stock Option Plan
In November 1997, the Compensation/Options Committee of the board of
directors approved the Mattel, Inc. 1997 Premium Price Stock Option Plan,
which was subsequently approved by the Company's stockholders at the May 1998
meeting. Under this plan, premium price options may be granted to officers and
other key employees of the Company. Grants made to individual participants
cannot exceed 4.5 million shares in any three consecutive calendar years.
Grants under the 1997 Premium Price Stock Option Plan in 1997 were intended to
replace annual grants under the 1996 Stock Option Plan until the end of the
year 2000.
F-24
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The exercise price of premium price options is calculated at 25% and 33-1/3%
above Mattel's six-month average stock price prior to the date of grant.
Options are forfeited unless the Company's common stock price reaches the
premium exercise price within two years from the date of grant for options
with a 25% premium price and within three years from the date of grant for
options with a 33-1/3% premium price. Options granted under the plan may not
be exercised for three years and expire five years from the date of grant.
Each option includes a Tandem Limited Stock Appreciation Right which gives the
holder the right to receive cash, shares of common stock or any combination of
cash and common stock upon the occurrence of a change of control as defined in
the plan. On February 4, 1999, the Company's board of directors approved an
amendment to the 1997 Premium Price Stock Option Plan authorizing an
additional 3.0 million shares for grant in connection with new employees of
businesses acquired by the Company, bringing the aggregate number of shares of
common stock available for grant under this plan to 24.0 million shares. This
plan expires on December 31, 2002.
Options to purchase 1.0 million shares and 17.7 million shares of common
stock were granted during 1998 and 1997, respectively. No options were
canceled, forfeited or exercisable during these periods. Shares available for
grant under this plan were 2.3 million and 3.3 million as of December 31, 1998
and 1997, respectively.
The fair value of premium price options granted during 1998 and 1997 has
been estimated using the Black-Scholes pricing model. The following
assumptions were used in determining fair value:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Expected life (in years)................................... 5.00 5.00
Risk-free interest rate.................................... 5.80% 6.33%
Volatility factor.......................................... 25.50% 24.10%
Dividend yield............................................. 0.83% 0.86%
</TABLE>
The fair value of options granted during 1998 and 1997 was $5.10 and $4.79
for 25% premium price options and $4.92 and $4.86 for 33 1/3% premium price
options, respectively.
The following table summarizes information about the remaining contractual
life (in years) and the exercise prices for premium price options outstanding
as of December 31, 1998 (options in thousands):
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------
Remaining
Number Life Price
----- --------- ------
<S> <C> <C>
8,894 3.85 $42.31
8,767 3.85 44.87
500 4.54 50.46
500 4.54 53.83
------ ------
18,661 $44.04
====== ======
</TABLE>
.Learning Company Stock Option Plans
Prior to the May 1999 merger, Learning Company and its subsidiaries had
various incentive and nonqualified stock option plans that provided benefits
for eligible employees and non-employee directors. Effective with the 1999
merger, each outstanding option under these plans was converted into an option
to purchase 1.2 shares of Mattel common stock. The exercise price of such
options was adjusted by dividing the Learning Company option price by 1.2.
Other than options granted under some plans assumed by Learning Company in
connection with recent acquisitions, all Learning Company stock options vested
and became fully exercisable as a result of the 1999 merger.
F-25
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of Learning Company options granted during 1998, 1997 and
1996 has been estimated using the Black-Scholes pricing model. The expected
life of these options used in this calculation has been determined using
historical exercise patterns. The following weighted average assumptions were
used in determining fair value:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Expected life (in years)............................ 6.00 4.00 4.00
Risk-free interest rate............................. 5.13% 6.00% 5.47%
Volatility factor................................... 68.00% 75.00% 78.57%
Dividend yield...................................... -- -- --
</TABLE>
The weighted average fair value of Learning Company options granted during
1998, 1997 and 1996 were $10.14, $8.81 and $8.99, respectively.
The following is a summary of stock option information and weighted average
exercise prices for Learning Company's stock option plans during the year
(options in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1...... 16,396 $14.43 14,694 $18.63 9,874 $14.89
Options assumed in
acquisitions................. -- -- 860 3.98 1,437 6.99
Options granted............... 8,979 15.29 9,695 11.12 9,643 19.11
Options exercised............. (4,660) 8.77 (1,489) 7.43 (3,983) 6.74
Options canceled.............. (3,089) 21.70 (7,364) 16.12 (2,277) 17.98
------ ------ ------
Outstanding at December 31.... 17,626 $14.30 16,396 $14.43 14,694 $18.63
====== ====== ======
Exercisable at December 31.... 6,602 $15.04 7,154 $13.05 5,558 $13.81
====== ====== ======
Available for grant at
December 31.................. 4,709 3,270 1,743
====== ====== ======
</TABLE>
The following table summarizes information about the weighted average
remaining contractual life (in years) and the weighted average exercise prices
for Learning Company stock options outstanding as of December 31, 1998
(options in thousands):
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------- -------------
Exercise Price Remaining
Ranges Number Life Price Number Price
-------------- ------ --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
$0.00 to $7.71......................... 2,281 8.19 $ 4.00 727 $ 4.98
8.13 to 12.92.......................... 4,141 7.74 10.36 2,591 9.34
12.97 to 23.96......................... 9,651 7.94 15.79 2,406 18.38
24.06 to 34.51......................... 1,517 7.95 29.54 856 29.85
79.92 to 79.92......................... 36 1.83 79.92 22 79.92
------ -----
$0.00 to $79.92........................ 17,626 7.92 $14.30 6,602 $15.04
====== =====
</TABLE>
In March 1997, in order to provide a competitive employment environment for
employee retention and hiring, Learning Company instituted an option exchange
program under which certain employees (other than employee directors) with
options exercisable at $8.67 per share or higher were given the opportunity to
exchange such options for options with an exercise price of $8.67 per share. A
total of 4.4 million options were exchanged and have been included in the
canceled and granted totals for the year ended December 31, 1997.
F-26
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
.Compensation Cost
Mattel, Tyco and Learning Company each adopted the disclosure-only
provisions of SFAS No. 123. Accordingly, no compensation cost has been
recognized in the results of operations for nonqualified stock options granted
under these plans during the years ended December 31, 1998, 1997 and 1996. Had
compensation cost for nonqualified stock options been determined based on
their fair value at the date of grant consistent with the method of accounting
prescribed by SFAS No. 123, the Company's net income (loss) and earnings per
share would have been reduced as follows (amounts in millions except per share
data):
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $206.1 $(182.7) $ 22.0
Stock option plans (67.1) (38.6) (24.9)
Premium price stock option plan (21.1) - -
-------------------------------------------
Pro forma income (loss) $117.9 $(221.3) $ (2.9)
===========================================
Income (loss) per share
Basic
As reported $ 0.51 $ (0.52) $ 0.04
Stock option and premium price
option plans (0.17) (0.11) (0.07)
-------------------------------------------
Pro forma basic income (loss) $ 0.34 $ (0.63) $(0.03)
===========================================
Diluted
As reported $ 0.47 $ (0.52) $ 0.04
Stock option and premium price
option plans (0.16) (0.11) (0.07)
-------------------------------------------
Pro forma diluted income (loss) $ 0.31 $ (0.63) $(0.03)
===========================================
</TABLE>
The pro forma effect on the Company's 1998, 1997 and 1996 net income is not
indicative of the pro forma effect in future years, because it does not take
into consideration the pro forma expense related to grants made prior to 1995.
Stock Subscription Warrants
Mattel currently has outstanding warrants exercisable into 751.4 thousand
shares of the Company's common stock at an exercise price of approximately $4.77
per share. These warrants expire on June 30, 2000.
Learning Company currently has outstanding warrants exercisable into 146.2
thousand shares of common stock at an exercise price of approximately $5.13
per share. These warrants expire on June 30, 1999. The Company assumed
Learning Company's obligation related to these warrants upon consummation of
the May 1999 merger.
Disney Warrant
In June 1996, Mattel entered into a licensing agreement with Disney
Enterprises, Inc. Pursuant to this agreement, the Company issued Disney a
warrant to purchase 3.0 million shares of the Company's common stock at an
exercise price of $27.375 per share. This warrant cannot be exercised prior to
April 2, 1999 and expires no later than April 2, 2004. The warrant's fair value
of $26.4 million was determined using the Black-Scholes pricing model, assuming
an expected life of eight years, a dividend yield of 0.88%, a risk-free interest
rate of 6.17%, and a volatility factor of 27.60%.
The fair value of the warrant is amortized as a component of royalty expense
when the related properties are introduced over the period the related
revenues are recognized. During 1998 and 1997, $3.2 million and $1.1 million,
respectively, was recognized in the results of operations related to this
warrant.
Learning Company Employee Stock Purchase Plan
In December 1997, Learning Company stockholders approved the 1997 Employee
Stock Purchase Plan, which provided certain eligible employees with the
opportunity to purchase shares of common stock at a price of 85% of the price
listed on the New York Stock Exchange at various specified purchase dates. The
plan met
F-27
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the criteria established in SFAS No. 123 for noncompensatory employee stock
purchase plans and therefore, no compensation expense was recorded in
connection with this plan. During the year ended December 31, 1998, 56.5
thousand shares were purchased by employees under this plan. As a result of
the May 1999 merger, the 1997 Employee Stock Purchase Plan was terminated.
Prior to their merger with Learning Company, Broderbund also had an employee
stock purchase plan. During the year ended December 31, 1997, approximately 62
thousand shares were purchased by employees under this plan. As a result of the
merger with Learning Company, the Broderbund employee stock purchase plan was
terminated.
Common Stock Repurchase Plan
Mattel's common stock repurchase plan, initiated in May 1990, provides for
the repurchase of common shares to fund the Company's stock option plans. The
number of shares to be repurchased is authorized on an annual basis by the
board of directors based upon anticipated reissuance needs. During 1998, 1997,
and 1996, Mattel repurchased 9.7 million, 6.5 million, and 10.0 million
shares, respectively.
Dividends and Capital Transactions
A regular quarterly cash dividend has been declared by the Mattel board of
directors on the Company's common stock since the second quarter of 1990. The
board of directors increased the quarterly cash dividend from $0.07 per common
share to $0.08 per common share in the second quarter of 1998. Learning
Company did not pay dividends on its common stock during the years ended
December 31, 1998, 1997 and 1996. Tyco was precluded from paying cash
dividends on its common stock for the year ended December 31, 1996 due to
limitations set forth in its various debt agreements.
Note 6--Commitments and Contingencies
Leases
The Company routinely enters into noncancelable lease agreements for
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, 1998 (in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
1999................................................ $ 400 $ 51,500
2000................................................ 300 40,600
2001................................................ 300 29,400
2002................................................ 300 16,600
2003................................................ 300 10,500
Thereafter.......................................... 9,600 14,900
------- --------
$11,200(a) $163,500
======= ========
</TABLE>
- --------
(a) Includes $8.7 million of imputed interest.
Rental expense under operating leases amounted to $66.6 million, $71.5
million and $65.0 million for 1998, 1997 and 1996, respectively, net of
sublease income of $0.5 million, $0.3 million and $0.5 million in 1998, 1997
and 1996, respectively.
F-28
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments
In the normal course of business, the Company enters into contractual
arrangements to obtain and protect the Company's right to create and market
certain products and for future purchases of goods and services to ensure
availability and timely delivery. Such arrangements include royalty payments
pursuant to licensing agreements and commitments for future inventory
purchases. Certain of these commitments routinely contain provisions for
guaranteed or minimum expenditures during the terms of the contracts. Current
and future commitments for guaranteed payments reflect the Company's focus on
expanding its product lines through alliances with businesses in other
industries, such as television and motion picture entertainment companies.
The largest commitment involves the Company's 1991 agreement with The Walt
Disney Company. This licensing agreement, which contains annual minimum
royalty guarantees, permits the Company to use the Disney name and certain
characters on preschool and infant products through September 2002. In related
agreements, the Company participates in attractions and toy stores at three
Disney theme parks under agreements in effect through June 2002. Under these
agreements, the Company makes semi-annual payments to Disney.
In June 1996, the Company entered into a licensing agreement with Disney
Enterprises, Inc. for an expanded strategic alliance, which grants the Company
exclusive worldwide rights (with certain exceptions) to produce toys based on
all children-oriented Disney television and film properties introduced,
commencing summer 1997. The agreement spans three years, with the Company
having the right for up to two additional years to market merchandise from
film properties produced during the second and third years. The initial term
of the agreement may be renewed for an additional three-year period upon
mutual consent. This agreement contains minimum royalty guarantees that are
contingent upon the number and nature of the properties introduced by Disney.
Commitments for 1999 introductions are expected to approximate $19 million
payable over a three-year period. Future commitments could be up to $37.8
million per introduction year. Pursuant to the agreement, the Company issued
Disney a stock warrant, valued at $26.4 million, to purchase 3.0 million
shares of the Company's common stock.
Licensing and related agreements provide for terms extending from 1999
through 2003 and contain provisions for future minimum payments as shown in
the following table (in thousands):
<TABLE>
<CAPTION>
Minimum
Payments
--------
<S> <C>
1999.............................................................. $141,000
2000.............................................................. 98,000
2001.............................................................. 94,000
2002.............................................................. 58,000
2003.............................................................. 9,000
--------
$400,000
========
</TABLE>
Royalty expense for the years ended December 31, 1998, 1997 and 1996 was
$234.2 million, $225.8 million and $174.5 million, respectively.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million.
Foreign Currency Contracts
To limit the exposure associated with exchange rate movements, the Company
enters into foreign currency forward exchange and option contracts primarily
as hedges of inventory purchases, sales and other intercompany
F-29
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
transactions denominated in foreign currencies. These contracts generally have
maturity dates of up to 18 months. Gains or losses related to firm
commitments, which qualify for hedge accounting, are deferred and are
recognized in the results of operations as part of the underlying transaction.
Contracts that do not qualify for hedge accounting are marked to market with
gains and losses recognized in the results of operations currently. Had the
Company not entered into hedges to limit the effect of exchange rate
fluctuations on results of operations and cash flows, the favorable effect on
1998 pre-tax income would have approximated $5 million.
As of December 31, 1998 and 1997, Mattel held the following contracts to sell
foreign currencies (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Fair Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Forwards................................. $392,972 $394,340 $353,085 $351,169
Options.................................. -- -- 93,547 90,500
-------- -------- -------- --------
$392,972 $394,340 $446,632 $441,669
======== ======== ======== ========
</TABLE>
Fair value for forwards reflects the amount, based on dealer quotes,
Mattel would receive at maturity for contracts involving the same currencies
and maturity dates, if they had been entered into as of year-end 1998 and
1997, respectively. During 1998, Mattel did not enter into any new option
contracts and no option contracts remained outstanding as of December 31,
1998. As of December 31, 1997, the fair value for options reflects the amount
of US dollars Mattel would receive from the current contracts, less the
respective year-end option value. The option value is determined based on
dealer quotes for contracts involving the same currencies and maturity dates.
As of December 31, 1998 and 1997, Mattel held $189.1 million and $362.1
million, respectively, of foreign currency forward exchange contracts to
purchase foreign currencies. The fair value of these contracts was $201.8
million and $346.5 million as of December 31, 1998 and 1997, respectively. Fair
value reflects the amount, based on dealer quotes, Mattel would pay at maturity
for contracts involving the same currencies and maturity dates, if they had been
entered into as of year-end 1998 and 1997, respectively.
Learning Company did not enter into any foreign currency exchange or option
contracts.
F-30
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes Mattel's foreign currency contracts by major
currency as of December 31, 1998 and 1997 (in thousands of US dollars):
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Buy Sell Buy Sell
-------- -------- -------- --------
<S> <C> <C> <C> <C>
US dollars.............................. $392,972 $189,122 $446,632 $362,083
German marks............................ 19,119 144,660 19,179 73,977
Italian lira............................ 20,014 68,358 38,277 53,161
Malaysian ringgits...................... -- -- 53,304 --
Hong Kong dollars....................... 55,829 -- 148,084 2,527
French francs........................... 27,435 9,105 -- 52,756
British pounds sterling................. 6,548 66,856 32,548 72,580
Canadian dollars........................ 16,144 18,794 22,608 --
Spanish pesetas......................... 5,625 2,899 -- 19,363
Dutch guilders.......................... 5,079 8,086 12,778 49,967
Japanese yen............................ -- 12,501 -- 7,956
Australian dollars...................... 4,988 21,610 6,398 --
Belgian francs.......................... -- 11,641 -- 60,038
Swiss francs............................ 18,341 -- 13,677 --
Mexican peso............................ -- 22,000 -- 50,200
Indonesian rupiah....................... 10,000 -- 15,230 --
Other (under $5,000).................... -- 6,462 -- 4,107
-------- -------- -------- --------
$582,094 $582,094 $808,715 $808,715
======== ======== ======== ========
</TABLE>
In order to minimize the risk of counterparty non-performance, the Company
executes its foreign currency forward exchange and option contracts with
financial institutions believed to be credit-worthy, generally those that
provide the Company with its working capital lines of credit.
Market risk exposures exist with respect to the settlement of foreign
currency transactions during the year because currency fluctuations cannot be
predicted with certainty. The Company seeks to mitigate its exposure to market
risk by monitoring its currency exchange exposure for the year and partially
or fully hedging such exposure. In addition, the Company manages its exposure
through the selection of currencies used for international borrowings and
intercompany invoicing. Mattel does not trade in financial instruments
for speculative purposes.
Litigation
.Beaverton, Oregon
Mattel operates a manufacturing facility on a leased property in Beaverton,
Oregon that was acquired as part of the March 1997 merger with Tyco. In March
1998, samples of groundwater used by the facility for process water and drinking
water disclosed elevated levels of certain chemicals, including
trichloroethylene ("TCE"). Mattel immediately closed the water supply and self-
reported the sample results to the Oregon Department of Environmental Quality
("DEQ") and Oregon Health Division. Mattel also implemented an employee
communication and medical screening program.
In November 1998, Mattel and another potentially responsible party entered
into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the facility, to propose an interim remedial
action measure and to continue the community outreach program to employees,
former employees and surrounding
F-31
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
landowners. It is not presently possible to estimate the cost to the Company
related to the DEQ's investigation and any subsequent orders for work.
.Toys R Us
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc. The
administrative law judge made findings of fact and conclusions of law that the
toy retailer Toys R Us, Inc. had violated federal antitrust laws and entered
into vertical and horizontal arrangements with various toy manufacturers,
including Mattel, whereby the manufacturers would refuse to do business with
warehouse clubs, or would do business with warehouse clubs only on terms
acceptable to Toys R Us. On October 13, 1998, the Federal Trade Commission
issued an opinion and a final order affirming the findings and conclusions of
the administrative law judge. Toys R Us has now filed a notice of appeal in
the United States Court of Appeals for the Seventh Circuit.
Following the announcement of the administrative law judge's decision,
Mattel was named as a defendant, along with certain other toy manufacturers,
in a number of antitrust actions in various states related to the Toys R Us
matter. The Company has also been named as a defendant in a series of private
treble damage class actions under federal antitrust laws that have been filed
in various federal district courts.
Since May 1998, Mattel has participated in settlement negotiations conducted
with the aid of a mediator. In connection with the settlement agreement, Mattel
recognized a $6.0 million pre-tax charge in the fourth quarter of 1998. The
settlement agreement calls for Mattel to make cash and toy contributions prior
to November 1999. Until such time as these matters are concluded in the various
courts involved, Mattel intends to vigorously defend itself in the litigation in
which it is named involving Toys R Us.
.Greenwald
On October 13, 1995, Michelle Greenwald filed a complaint against Mattel in
Superior Court of the State of California, County of Los Angeles. Ms. Greenwald
is a former employee of Mattel who was terminated in July 1995. Her complaint
sought $50 million in general and special damages, plus punitive damages, for
breach of oral, written and implied contract, wrongful termination in violation
of public policy and violation of California Labor Code Section 970. Ms.
Greenwald claimed that her termination resulted from complaints she made to
management concerning general allegations that the Company did not properly
account for sales and certain costs associated with sales and more specific
allegations that the Company failed to properly account for certain royalty
obligations to The Walt Disney Company. During 1996 and 1997, the Company's
motions for summary judgment on all areas of her complaint were granted. In
1998, Ms. Greenwald filed a notice of appeal, which is still pending. The
Company intends to defend the action vigorously, including her appeal.
.Business Combination with Learning Company
During December 1998, a total of six separate purported class action
complaints were filed by several stockholders of Learning Company in the Court
of Chancery of the State of Delaware in and for New Castle County against
Learning Company and its board of directors for alleged breaches of fiduciary
duties in connection with the May 1999 merger. The six complaints have since
been consolidated. The consolidated complaint seeks the certification as a
class of all Learning Company stockholders, an injunction against the merger,
rescission if the merger is consummated, damages, costs and disbursements,
including attorneys' fees. The consolidated complaint alleges that Learning
Company's board of directors breached their fiduciary duties to Learning
Company's stockholders by, among other things, failing to conduct due diligence
sufficient to have discovered material, adverse information concerning Mattel's
anticipated operational and financial results and agreeing to an exchange ratio
that failed to protect Learning Company stockholders against a decline in the
value of Mattel common stock. The consolidated complaint names Mattel as an
additional defendant, claiming that Mattel aided and abetted the alleged
breaches of fiduciary duty. Mattel will aggressively defend itself against the
action.
.Other Matters
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability, labor and
environmental cleanup, which are being addressed or defended in the ordinary
course of business. Management believes that any liability, which may
potentially result upon resolution of such matters, will not have a material
adverse effect on Mattel's consolidated financial position or results of
operations.
F-32
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7 - Acquisitions and Nonrecurring Items
Mattel Acquisitions
During 1998, Mattel acquired Pleasant Company and Bluebird, which were accounted
for using the purchase method of accounting. The results of operations of the
acquired companies have been included in the Company's supplementary
consolidated financial statements from their respective dates of acquisition.
In July 1998, Mattel completed its acquisition of Pleasant Company, a
Wisconsin-based direct marketer of books, dolls, clothing, accessories, and
activity products included under the American Girl brand name. The purchase
price, including investment advisor and other costs directly related to the
acquisition, was approximately $715 million. The excess of cost over the
estimated fair market value of tangible net assets acquired was approximately
$690 million. Total excess has been allocated to customer lists, a covenant
not-to-compete, and magazine subscription lists which are being amortized on a
straight-line basis over a 3 to 15 year period, with the remaining excess being
amortized on a straight-line basis over 40 years.
In June 1998, Mattel acquired Bluebird, a company organized in the United
Kingdom, from which Mattel licensed the product designs for its Polly Pocket and
Disney Tiny Collections brands, as well as the Polly Pocket trademarks. The
aggregate purchase price, including investment advisor and other directly
related expenses, was approximately $80 million. Intercompany accounts and
transactions between Bluebird and the Company have been eliminated. The excess
of cost over the estimated fair market value of tangible net assets acquired was
approximately $60 million, which is being amortized on a straight-line basis
over 40 years.
Learning Company Acquisitions
Learning Company acquired Sofsource, Inc. and Mindscape, Inc. in 1998, Creative
Wonders, L.L.C. and Parsons Technology in 1997, and Minnesota Educational
Computing Corporation in 1996, each of which were accounted for using the
purchase method of accounting. The results of operations of the acquired
companies have been included in the supplementary consolidated financial
statements from their respective dates of acquisition.
In June 1998, Learning Company acquired Sofsource, Inc., an educational
software company. The purchase price was $45.0 million, which was settled
through the issuance of 2.0 million shares of common stock. The purchase price
was allocated to incomplete technology, and brands and trade names, with the
remainder to goodwill. The portion of the purchase price allocated to
incomplete technology of $14.9 million was charged to expense during 1998, while
the amounts allocated to brands and trade names, and goodwill were capitalized
and are each being amortized on a straight-line basis over their estimated
useful lives of 10 years.
F-33
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1998, Learning Company acquired Mindscape, Inc., a consumer software
company, and certain affiliated companies. The purchase price was $152.6
million, which was settled in cash of $122.6 million and through the issuance of
1.6 million shares of common stock. The purchase price was allocated to
incomplete technology, completed technology and products, and brands and trade
names, with the remainder to goodwill. The portion of the purchase price
allocated to incomplete technology of $40.0 million was charged to expense
during 1998, while the amounts allocated to completed technology and products,
brands and trade names, and goodwill were capitalized and are being amortized on
a straight-line basis over their estimated useful lives of 2, 10 and 10 years,
respectively.
In October 1997, Learning Company acquired Creative Wonders, L.L.C., an
educational software company. The purchase price of $37.8 million, including
the value of employee stock options assumed and transaction costs, was allocated
to incomplete technology, and brands and related content rights. The portion of
the purchase price allocated to incomplete technology of $1.1 million was
charged to expense during 1997, while the amount allocated to brands and related
content rights was capitalized and is being amortized on a straight-line basis
over the estimated useful life of 10 years.
In August 1997, Learning Company acquired Parsons Technology, a direct-to-
consumer marketing organization which publishes a range of consumer software.
The purchase price of $31.0 million, including transaction costs, was allocated
to incomplete technology, customer lists, and brands and related content rights.
The portion of the purchase price allocated to incomplete technology of $10.0
million was charged to expense during 1997, while the amounts allocated to
customer lists and brands and related content rights were capitalized and are
being amortized on a straight-line basis over their estimated useful lives of 3
and 10 years, respectively.
In May 1996, Learning Company acquired Minnesota Educational Computing
Corporation, a publisher and developer of high quality children's educational
software sold to consumers and schools. The purchase price was $284.6 million,
including transaction costs, the value of employee stock options assumed, and
deferred income taxes related to certain identifiable intangible assets
acquired. The purchase price, which was settled through the issuance of 11.1
million shares of common stock, was allocated to incomplete technology,
completed technology, and brands and related content rights, with the remainder
to goodwill. The portion of the purchase price allocated to incomplete
technology of $56.7 million was charged to expense during 1996, while the
amounts allocated to completed technology, brands and related content rights,
and goodwill were capitalized and are being amortized on a straight-line basis
over their estimated useful lives of 2, 10 and 10 years, respectively.
Learning Company also made other minor acquisitions during 1997 and 1996 which
were accounted for using the purchase method. These acquisitions resulted in
the issuance of 0.4 million and 1.0 million shares of common stock in the years
ended December 31, 1997 and 1996, respectively.
Pro Forma Effect of 1998 Acquisitions
The unaudited pro forma results of operations for 1998 acquisitions accounted
for using the purchase method of accounting are as follows (amounts in thousands
except per share data):
<TABLE>
<CAPTION>
Acquired Pro Forma
Mattel Companies Combined
- ------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C>
Net sales $5,621,207 $ 103,862 $5,725,069
Income before extraordinary item 206,053 (102,175) 103,878
Net income 206,053 (102,175) 103,878
Basic income per share 0.51 0.24
Diluted income per share 0.47 0.22
1997
Net sales $5,455,547 $ 550,659 $6,006,206
Loss before extraordinary item (178,111) (61,827) (239,938)
Net loss (182,721) (61,827) (244,548)
Basic loss per share
Loss before extraordinary item (0.51) (0.65)
Net loss (0.52) (0.66)
Diluted loss per share
Loss before extraordinary item (0.51) (0.65)
Net loss (0.52) (0.66)
- ------------------------------------------------------------------------------------------
</TABLE>
The amounts shown for acquired companies assumes that the Company's 1998
acquisitions occurred on January 1, 1997. Pro forma adjustments have been made
to reflect the amortization of intangible assets and goodwill capitalized as a
result of the acquisitions, incremental interest expense that would have been
incurred as a result of financing the acquisition of Pleasant Company as of
January 1, 1997, and elimination of intercompany sales and margins related to
the acquisition of Bluebird.
F-34
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mattel Business Combination
In March 1997, Mattel completed its merger with Tyco, accounted for as a pooling
of interests. Under the merger agreement, each outstanding share of Tyco common
stock was converted into the right to receive 0.48876 Mattel common shares and
resulted in the issuance of approximately 17 million shares. Tyco restricted
stock units and stock options outstanding as of the merger date were exchanged
for approximately 0.6 million Mattel common shares. In addition, each share of
Tyco Series B and Series C Preferred Stock was converted into like Mattel
preferred stock. Financial information for periods prior to the merger reflect
the retroactive restatement of the companies' combined financial position and
operating results.
Learning Company Business Combinations
Pursuant to an Agreement and Plan of Merger dated June 21, 1998, a merger was
consummated between Learning Company and Broderbund Software, Inc.
("Broderbund"), a publisher and developer of consumer software for the home and
school market, on August 31, 1998. The stock-for-stock transaction was approved
by the stockholders of Broderbund, after which Broderbund became a wholly-owned
subsidiary of Learning Company. Under the merger agreement, each outstanding
share of Broderbund common stock was converted into the right to receive 0.80
shares of Learning Company common stock and resulted in the issuance of
approximately 17 million shares of Learning Company common stock.
This transaction was accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect the
retroactive restatement of the companies' combined financial position and
operating results. The supplementary consolidated balance sheet as of December
31, 1997 has been combined with the balance sheet of Broderbund as of November
30, 1997. The supplementary consolidated statement of stockholders' equity for
the year ended December 31, 1998 has been adjusted to include Broderbund's
unrealized gain on securities of $0.5 million (included in comprehensive income)
and net income of $0.2 million for the month ended December 31, 1997.
Broderbund's net sales and operating expenses for the month ended December 31,
1997 were $28.7 million and $28.0 million, respectively. The supplementary
consolidated statements of operations, cash flows and stockholders' equity for
the years ended December 31, 1997 and 1996 have been combined with those of
Broderbund for the twelve-month period ended November 30, 1997 and the fiscal
year ended August 31, 1996. Broderbund's results of operations for the period
from September 1, 1996 through November 30, 1996 have been omitted from the
supplementary consolidated statements of operations. The supplementary
consolidated statement of stockholders' equity for the year ended December 31,
1997 has been adjusted to include Broderbund's net income of $8.9 million for
the period from September 1, 1996 through November 30, 1996. Broderbund's net
sales and operating expenses for the period from September 1, 1996 through
November 30, 1996 were $61.5 million and $25.8 million, respectively.
Learning Company also merged with Palladium Interactive, Inc. and P.F.
Magic, Inc. in 1998 and TEC Direct, Inc., Microsystems Software, Inc., Skills
Bank Corporation and Learning Services Inc. in 1997, each of which were
accounted for as poolings of interests. The supplementary consolidated
financial statements have not been retroactively restated for the results of
operations and financial position of these companies as they were deemed to be
immaterial to the supplementary consolidated financial statements for those
periods. The supplementary consolidated statements of stockholders' equity for
the years ended December 31, 1998 and 1997 have been adjusted to include the
historical results of operations of the acquired companies of $34.6 million and
$6.2 million, respectively. A total of 1.6 million and 3.8 million common
shares were issued in the years ended December 31, 1998 and 1997, respectively,
as a result of these mergers.
F-35
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restructuring and Other Charges
During the years ended December 31, 1998, 1997 and 1996, the Company incurred
restructuring and other charges related to the following:
1998 - the integration of the business operations of Broderbund and Mindscape,
Inc. as a result of their respective acquisitions, a voluntary recall of certain
Power Wheels(R) ride-on vehicles, and the settlement of the Toys R Us-related
antitrust litigation
1997 - the integration of the business operations of Tyco as a result of its
acquisition, further restructuring of the business operations of Mattel by
consolidating some manufacturing and distribution operations, eliminating
duplicative marketing and administrative offices, terminating various
distributor and licensing arrangements, and abandoning some product lines, and
integration of the business operations of Creative Wonders, L.L.C., Learning
Services, Inc., Skills Bank Corporation, Microsystems Software, Inc. and TEC
Direct, Inc. as a result of their respective acquisitions
1996 - the integration of the business operations of Minnesota Educational
Computing Corporation as a result of its acquisition
The following table summarizes the nature of the charges incurred (in
millions):
<TABLE>
<CAPTION>
For the Year Ended
------------------------------------------
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Severance and other compensation $ 30.1 $ 95.5 $ 4.3
Sale and writedown of fixed assets - 88.4 -
Lease termination costs - 31.6 -
Distributor, license and other contract terminations 16.5 19.9 -
Discontinued product costs 30.9 23.3 -
Facility closure costs 19.5 8.2 -
Other costs - 18.1 -
------------------------------------------
Total restructuring charges 97.0 285.0 4.3
Merger-related transaction costs 16.3 58.6 8.0
Charge for incomplete technology 56.8 20.3 56.7
Special charges 44.0 - -
------------------------------------------
$214.1 $363.9 $69.0
==========================================
</TABLE>
As of December 31, 1998, expenditures related to the 1998 restructuring
charge were $91.0 million. The Company expects activities related to this
charge to be substantially completed during 1999. As of December 31, 1998,
activity related to the 1997 and 1996 restructuring charges were substantially
complete and amounts previously accrued had been paid, and the type and amount
of charges incurred to date approximated the amounts included in the provisions.
F-36
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The charge for incomplete technology for the years ended December 31, 1998,
1997 and 1996 relates to products being developed by acquired companies at the
time of their acquisitions. In each case, Learning Company believes such
products had not yet reached technological feasibility, had no future
alternative use as of the date of acquisition, and required additional
development to complete the software technology and products. In order to
develop the acquired incomplete technology into commercially viable products,
Learning Company was required to complete the development of proprietary code,
development of the artistic and graphic works, and design of the remaining
storyboards. Learning Company incurred approximately $18 million in 1998 and
expects to incur a further $7 million to complete the development of incomplete
technology related to 1998 acquisitions. The in-process development associated
with 1997 and 1996 acquisitions was generally completed approximately 16 months
from the respective acquisition dates. In order to complete the development of
acquired incomplete technology, Learning Company spent approximately $0.5
million in 1998 related to 1997 acquisitions and $6 million (incurred in 1996
and 1997) related to 1996 acquisitions.
In the 1998 third quarter, Mattel recognized a $38.0 million pre-tax charge
related to a voluntary recall of certain Power Wheels(R) ride-on vehicles. The
recall did not result from any serious injury, and involves the replacement of
electronic components that may overheat, particularly when consumers make
alterations to the product.
In the 1998 fourth quarter, Mattel recognized a $6.0 million pre-tax charge
related to the settlement of the Toys R Us-related antitrust litigation. The
settlement agreement calls for cash and toy contributions by the Company prior
to November 1999.
The impact of restructuring and other charges on the Company's diluted
earnings per share was as follows:
<TABLE>
<CAPTION>
For the Year Ended
------------------------------------------
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Amortization of intangibles $0.28 $1.30 $1.25
Restructuring charges and merger-related
transaction costs 0.18 0.71 0.02
Charge for incomplete technology 0.13 0.05 0.15
Special charges 0.07 - -
------------------------------------------
Total $0.66 $2.06 $1.42
==========================================
</TABLE>
F-37
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Segment Information
In the 1998 fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. This statement supersedes Statement of Financial
Accounting Standards No. 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. This statement requires
disclosure of certain information by reportable segment, geographic area and
major customer.
The table below presents information about segment revenues, operating
profit and assets. Mattel's reportable segments are separately managed business
units and include toy marketing, toy manufacturing, and consumer software sales
and development. The toy marketing segment is divided on a geographic basis
between domestic and international. The domestic toy 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 principally sells Infant and Preschool products. The Other
toy segment is principally involved in selling specialty products in the Girls
category. The international toy segment sells products in all categories. The
consumer software segment is comprised of educational and entertainment products
developed and sold by Learning Company on a worldwide basis. Mattel's toy
manufacturing segment, Operations, manufactures toy products, which are sold to
the marketing segments based on intercompany transfer prices. Such prices are
based on manufacturing costs plus a profit margin. 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 and extraordinary item as reported
in the supplementary consolidated statements of operations. The segment assets
are comprised of accounts receivable and inventories, net of applicable reserves
and allowances.
<TABLE>
<CAPTION>
Revenues
From Profit/(Loss)
External Intersegment From Segment Depreciation/
(In thousands) Customers Revenues Operations Assets Amortization*
- ------------------------------------------------------------------------------------------------------------
1998
Marketing
Domestic:
<S> <C> <C> <C> <C> <C>
USA Toys $2,249,883 $ - $ 333,243 $ 571,976 $ 61,510
Fisher-Price/Tyco Preschool 902,018 - 97,813 279,773 41,376
Other segments 213,224 - 35,134 71,575 14,071
International 1,712,509 - 158,007 602,063 49,234
Learning Company 839,315 - 57,518 226,913 97,779
Operations 2,182 1,486,320 151,905 88,613 25,629
---------- ----------- --------- ---------- --------
Segment total 5,919,131 1,486,320 833,620 1,840,913 289,599
Elimination of intersegment
sales - (1,486,320) - - -
Sales adjustments (297,924) - - - -
Restructuring and other
charges (157,314)
Interest expense - - (128,468) - -
Corporate and other - - (156,206) (46,592) 23,085
---------- ----------- --------- ---------- --------
Consolidated total $5,621,207 $ - $ 391,632 $1,794,321 $312,684
========== =========== ========= ========== ========
</TABLE>
F-38
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1997
Marketing
Domestic:
<S> <C> <C> <C> <C> <C>
USA Toys $2,388,988 $ - $ 485,879 $ 588,154 $ 51,358
Fisher-Price/Tyco Preschool 1,030,906 - 87,742 337,680 43,926
International 1,733,605 - 218,659 538,099 45,024
Learning Company 620,931 - (332,778) 201,309 464,086
Operations 2,018 1,552,029 144,058 73,048 32,145
---------- ----------- --------- ---------- --------
Segment total 5,776,448 1,552,029 603,560 1,738,290 636,539
Elimination of intersegment
sales - (1,552,029) - - -
Sales adjustments (320,901) - - - -
Restructuring and other
charges - - (343,606) - -
Interest expense - - (112,612) - -
Corporate and other - - (146,126) (16,721) 17,458
---------- ----------- --------- ---------- --------
Consolidated total $5,455,547 $ - $ 1,216 $1,721,569 $653,997
========== =========== ========= ========== ========
<CAPTION>
1996
Marketing
Domestic:
<S> <C> <C> <C> <C> <C>
USA Toys $2,088,009 $ - $ 398,633 $ 527,821 $ 44,453
Fisher-Price/Tyco Preschool 920,581 - 84,045 228,793 36,105
International 1,819,487 - 179,826 586,277 50,218
Learning Company 529,528 - (308,843) 104,600 443,815
Operations 9,796 1,586,885 146,233 83,323 27,492
---------- ----------- --------- ---------- --------
Segment total 5,367,401 1,586,885 499,894 1,530,814 602,083
Elimination of intersegment
sales - (1,586,885) - - -
Sales adjustments (302,541) - - - -
Restructuring and other
charges (12,312)
Interest expense - - (126,929) - -
Corporate and other - - (171,755) (33,096) 23,075
---------- ----------- --------- ---------- --------
Consolidated total $5,064,860 $ - $ 188,898 $1,497,718 $625,158
========== =========== ========= ========== ========
</TABLE>
*Included in depreciation and amortization are charges for tooling. Such
charges are allocated among segments based on a percentage of relative sales.
The toy marketing segments sell a broad variety of children's toy products,
which are grouped into four major categories: Girls, Infant and Preschool,
Entertainment and Wheels. Learning Company is a leading publisher of consumer
software for the home personal computer. The table below presents revenues from
external customers by category:
<TABLE>
<CAPTION>
For the Year
---------------------------------------------------------
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Girls $2,125,800 $2,217,400 $2,102,500
Infant and Preschool 1,684,200 1,739,900 1,516,000
Wheels 713,300 590,700 487,900
Entertainment 480,100 421,700 440,100
Other 76,416 185,817 291,373
---------------------------------------------------------
5,079,816 5,155,517 4,837,873
Sales adjustments (297,924) (320,901) (302,541)
---------------------------------------------------------
Toy category 4,781,892 4,834,616 4,535,332
Learning Company 839,315 620,931 529,528
---------------------------------------------------------
Consolidated total $5,621,207 $5,455,547 $5,064,860
=========================================================
</TABLE>
F-39
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information by geographic area. Revenues are
attributed to countries based on location of customer. Long-lived assets
principally include net property, plant and equipment, and goodwill.
<TABLE>
<CAPTION>
Long-Lived
(In thousands) Net Sales Assets
- --------------------------------------------------------------------------------
<S> <C> <C>
1998
United States $3,998,823 $1,580,625
International 1,622,384 635,238
---------- ----------
5,621,207 2,215,863
Corporate and other - 245,985
---------- ----------
Consolidated total $5,621,207 $2,461,848
========== ==========
1997
United States $3,770,540 $ 770,147
International 1,685,007 518,198
---------- ----------
5,455,547 1,288,345
Corporate and other - 229,625
---------- ----------
Consolidated total $5,455,547 $1,517,970
========== ==========
1996
United States $3,303,843 $1,160,037
International 1,761,017 600,947
---------- ----------
5,064,860 1,760,984
Corporate and other - 191,917
---------- ----------
Consolidated total $5,064,860 $1,952,901
========== ==========
</TABLE>
Credit is granted to customers on an unsecured basis, and generally
provides for extended payment terms, which result in a substantial portion of
trade receivables being collected during the latter half of the year. Customers
accounting for more than 10% of the Company's consolidated net sales and related
accounts receivable are as follows:
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Worldwide sales for the year ended
<S> <C> <C> <C>
Toys R Us $740.9 $862.7 $1,039.6
Wal-Mart 837.1 752.0 564.7
Accounts receivable as of December 31
Toys R Us $152.5 $262.6 $ 185.0
Wal-Mart 319.5 187.8 96.3
- ------------------------------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year Ended December 31, 1998(a)
Net sales...................... $ 884,500 $1,033,509 $1,884,843 $1,818,355
Gross profit................... 439,888 509,240 996,090 968,085
Advertising and promotion
expenses...................... 119,175 135,030 281,726 381,734
Other selling and
administrative expenses....... 242,092 263,402 278,059 361,248
Amortization of intangibles.... 49,600 33,091 20,674 26,324
Charge for incomplete
technology(b)................. 40,000 16,826 -- --
Restructuring and other
charges....................... 15,230 20,887 97,088 24,109
Other (income) expense,
net(d)........................ (2,147) (7,922) 8,870 (11,893)
(Loss) income before income
taxes......................... (47,156) 29,757 267,327 141,704
Net (loss) income.............. (55,957) 4,578 168,734 88,698
Preferred stock dividend
requirements.................. (1,990) (1,990) (1,990) (1,990)
Net (loss) income applicable to
common shares................. (57,947) 2,588 166,744 86,708
Basic (loss) income per common
share:
Net (loss) income............. $ (0.15) $ 0.01 $ 0.42 $ 0.22
Weighted average number of
common shares................ 376,364 384,596 399,218 397,237
Diluted income per common
share:
Net (loss) income............. $ (0.15) $ 0.01 $ 0.39 $ 0.20
Weighted average number of
common and common equivalent
shares....................... 376,364 423,407 435,123 424,296
Dividends declared per common
share......................... $ 0.07 $ 0.08 $ 0.08 $ 0.08
Common stock market price:
High.......................... $ 45.63 $ 43.63 $ 42.31 $ 39.63
Low........................... 35.63 36.00 28.00 21.69
Year Ended December 31,
1997(a)(e)
Net sales...................... $ 824,716 $1,101,255 $1,697,084 $1,832,492
Gross profit................... 412,347 546,118 898,285 962,910
Advertising and promotion
expenses...................... 114,764 148,825 262,190 320,669
Other selling and
administrative expenses....... 235,310 238,209 251,947 287,625
Amortization of
intangibles(f)................ 127,526 127,498 127,439 104,736
Restructuring and other
charges(g).................... 279,359 2,239 18,994 43,014
Other (income) expense,
net(h)........................ (2,451) (1,783) 5,661 (6,239)
(Loss) income before income
taxes and extraordinary item.. (377,255) 7,406 191,426 179,639
Extraordinary item--loss on
early retirement of debt...... -- -- (4,610) --
Net (loss) income.............. (316,529) (17,238) 110,847 40,199
Preferred stock dividend
requirements.................. (2,840) (2,837) (2,838) (1,990)
Net (loss) income applicable to
common shares................. (319,369) (20,075) 108,009 38,209
Basic (loss) income per common
share:
(Loss) income before
extraordinary item........... $ (0.87) $ (0.05) $ 0.30 $ 0.10
Extraordinary item--loss on
early retirement of debt..... -- -- (0.01) --
Net (loss) income............. $ (0.87) $ (0.05) $ 0.29 $ 0.10
Weighted average number of
common shares................ 366,648 370,419 369,724 371,090
Diluted (loss) income per
common share:
(Loss) Income before
extraordinary item........... $ (0.87) $ (0.05) $ 0.30 $ 0.10
Extraordinary item--loss on
early retirement of debt..... -- -- (0.01) --
Net (loss) income............. $ (0.87) $ (0.05) $ 0.29 $ 0.10
Weighted average number of
common and common equivalent
shares....................... 366,648 370,419 387,160 384,994
Dividends declared per common
share......................... $ 0.06 $ 0.07 $ 0.07 $ 0.07
Common stock market price:
High.......................... $ 29.25 $ 35.25 $ 35.75 $ 41.38
Low........................... 24.00 24.00 32.38 33.38
</TABLE>
- --------
(a) Financial information for all periods presented have been restated
retroactively for the effects of the May 1999 merger with Learning Company,
accounted for as a pooling of interests.
F-41
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Primarily represents the writeoff of products being developed by
Mindscape, Inc. and Sofsource, Inc. that had not reached technological
feasibility as of the dates of their respective acquisitions by Learning
Company in the first and second quarters of 1998. These products had no
alternative future use and additional development costs would have been
required to complete the software technology.
(c) Includes a nonrecurring charge in the third quarter related to a
voluntary recall of certain Power Wheels(R) ride-on vehicles, and a one-
time charge in the fourth quarter in connection with the proposed Toys R
Us-related antitrust litigation settlement, which reduced dilutive income
per share by $0.06 and $0.01, respectively.
(d) Third quarter of 1998 includes unrealized foreign currency exchange losses
that were partially recovered in the fourth quarter of 1998.
(e) Financial information for the first quarter of 1997 has been restated
retroactively for the effects of the March 1997 merger with Tyco,
accounted for as a pooling of interests.
(f) Includes the effect of $124.6 million of goodwill related to Learning
Company's acquisition of Minnesota Educational Computing Corporation in
May 1996.
(g) Represents a nonrecurring charge of $275.0 million for transaction,
integration and restructuring costs related to the merger with Tyco in the
first quarter of 1997.
(h) Third quarter of 1997 includes unrealized foreign currency exchange losses
that were partially recovered in the fourth quarter of 1997.
Note 10--Supplemental Financial Information
<TABLE>
<CAPTION>
As of Year End
-----------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Inventories include the following:
Raw materials and work in process....................... $ 48,473 $ 56,953
Finished goods.......................................... 595,797 411,273
-------- --------
$644,270 $468,226
======== ========
Prepaid expenses and other current assets include the
following:
Deferred income taxes................................... $215,370 $215,851
Other................................................... 156,402 111,766
-------- --------
$371,772 $327,617
======== ========
Intangibles, net include the following:
Goodwill................................................ $1,335,183 $599,157
Other................................................... 149,451 85,622
---------- --------
$1,484,634 $684,779
========== ========
Short-term borrowings include the following:
Notes payable........................................... $121,006 $ 52,618
Commercial paper........................................ 78,000 --
-------- --------
$199,006 $ 52,618
======== ========
Accrued liabilities include the following:
Advertising and promotion............................... $164,543 $149,058
Restructuring and other charges......................... 58,745 121,114
Royalties............................................... 112,839 88,641
Other................................................... 412,710 343,912
-------- --------
$748,837 $702,725
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the Year
-------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Selling and administrative expenses include the
following:
Research and development $274,820 $246,337 $212,436
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $124,087 $124,234 $127,566
Income taxes 102,163 113,496 118,915
Noncash investing and financing activities:
Common stock issued for acquisitions:
Sofsource, Inc. $ 45,000 $ - $ -
Mindscape, Inc. 30,000 - -
Minnesota Educational Computing Corporation - - 221,319
Other - 7,321 15,255
Settlement of earn-out agreements 5,572 2,023 -
Conversion of 5-1/2% Notes 96,695 202,033 -
Conversion of 7% Notes - 16,034 -
Issuance of stock warrant - - 26,444
Increase in paid-in capital due to value of in-the-money
employee stock options acquired in connection with
acquisitions - 2,969 19,444
Common stock issued for settlement of expenses - - 10,132
Conversion of other debt to equity - - 3,053
Equipment acquired under capital leases - - 1,262
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Note 11--New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
-------------------------------------
and Hedging Activities. This statement requires companies to record derivatives
- ----------------------
on the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The Company is required to adopt this
statement for its fiscal year beginning January 1, 2001. Management believes
the adoption of this statement will not have a material impact on the Company's
consolidated financial position or results of operations.
F-42
<PAGE>
MATTEL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Subsequent Events
Business Combination
Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a
merger was consummated between Mattel and Learning Company on May 13, 1999. The
stock-for-stock transaction was approved by the stockholders of both companies,
after which Learning Company was merged with and into Mattel, with Mattel being
the surviving corporation. Each share of Learning Company Series A Preferred
Stock was converted into 20 shares of Learning Company common stock just prior
to the consummation of the merger. According to the merger agreement, each
outstanding share of Learning Company common stock was then converted into the
right to receive 1.2 shares of Mattel common stock. As a result, approximately
126 million Mattel common shares were issued in exchange for all shares of
Learning Company common stock outstanding as of the merger date. The outstanding
share of Learning Company special voting stock was converted into the right to
receive one share of Mattel Special Voting Preferred Stock. Each outstanding
exchangeable non-voting share of Learning Company's Canadian subsidiary, Softkey
Software Products Inc., remains outstanding, but is now exchangeable into the
right to receive 1.2 shares of Mattel common stock.
This transaction has been accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect
retroactive restatement of the companies' combined financial position and
operating results. For periods preceding the merger, there were no material
intercompany transactions which required elimination from the combined
consolidated results of operations and there were no adjustments necessary to
conform the accounting practices of the two companies.
Selected financial information for the combining entities included in the
supplementary consolidated statements of operations for the three years ended
December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
For the Year
-----------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Mattel $4,781,892 $4,834,616 $4,535,332
Learning Company 839,315 620,931 529,528
-----------------------------------------------------------------
Combined $5,621,207 $5,455,547 $5,064,860
=================================================================
Net income (loss)
Mattel $ 332,264 $ 285,184 $ 372,224
Learning Company (a) (b) (126,211) (467,905) (350,262)
-----------------------------------------------------------------
Combined $ 206,053 $ (182,721) $ 21,962
=================================================================
</TABLE>
(a) The provision (benefit) for income taxes has been adjusted by $20.9
million, $(27.0) million and $(26.3) million in 1998, 1997 and 1996,
respectively, to reflect the reduction of valuation allowances established
in Learning Company's historical financial statements resulting in the
recognition of estimated benefits of net operating losses incurred by
Learning Company.
(b) 1996 net income has been reduced by $18.0 million to reflect the
elimination of the termination fee paid by the Former Learning Company to
Broderbund as a result of a proposed merger between the two companies that
was terminated. Net income in 1997 and 1996 has been increased by $9.0
million in each year to reflect the reduction in the purchase price paid by
Learning Company when it acquired the Former Learning Company and the
corresponding decrease in goodwill amortization.
Merger Integration and Restructuring Charge (Unaudited)
In April 1999, Mattel announced that as a result of the May 1999 merger with
Learning Company and a planned realignment of Mattel's operations to reduce
overhead costs, 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
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 writedowns. The Company expects to fund this restructuring through
existing cash balances and internally generated cash from operations. The
Company expects the combined actions to result in cost savings of approximately
$50 million in 1999 and at least $400 million over the following three years.
However, the amount of expected cost savings are preliminary estimates and the
Company cannot assure that its actions will result in these cost savings.
F-43
<PAGE>
EXHIBIT 99.2
Mattel, Inc. and Subsidiaries
Supplementary Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, March 31, Dec. 31,
(In thousands) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current Assets
Cash $ 242,078 $ 576,652 $ 469,213
Accounts receivable, net 1,069,006 1,093,839 1,150,051
Inventories 647,559 577,602 644,270
Prepaid expenses and other current assets 417,936 344,602 371,772
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 2,376,579 2,592,695 2,635,306
- -------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 34,763 28,730 35,113
Buildings 268,909 201,400 271,580
Machinery and equipment 580,179 526,466 569,428
Capitalized leases 21,406 24,485 23,271
Leasehold improvements 102,440 90,802 98,400
- -------------------------------------------------------------------------------------------------------------------------
1,007,697 871,883 997,792
Less: accumulated depreciation 435,598 392,841 422,020
- -------------------------------------------------------------------------------------------------------------------------
572,099 479,042 575,772
Tools, dies and molds, net 187,339 165,400 187,349
- -------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 759,438 644,442 763,121
- -------------------------------------------------------------------------------------------------------------------------
Other Noncurrent Assets
Intangibles, net 1,455,827 770,238 1,484,634
Other assets 275,066 240,900 264,324
- -------------------------------------------------------------------------------------------------------------------------
$4,866,910 $4,248,275 $5,147,385
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with The Learning Company, Inc.
("Learning Company"), accounted for as a pooling of interests. See Note 13.
<PAGE>
Mattel, Inc. and Subsidiaries
Supplementary 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 $ 324,435 $ 53,254 $ 199,006
Current portion of long-term liabilities 33,401 24,298 33,666
Accounts payable 242,548 273,355 362,467
Accrued liabilities 523,586 527,329 748,837
Income taxes payable 276,106 179,798 299,058
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,400,076 1,058,034 1,643,034
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Senior notes 600,955 387,650 600,955
Medium-term notes 540,500 520,500 540,500
Mortgage note 42,856 43,437 43,007
Other 155,415 148,226 149,086
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,339,726 1,099,813 1,333,548
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, Series A $0.01 par value, $200.00
liquidation preference per share, 0.8 million shares
authorized, issued and outstanding 8 8 8
Preferred stock, Series C $1.00 par value, $125.00
liquidation preference per share, 0.8 million shares
authorized, issued and outstanding 772 772 772
Special voting preferred stock $1.00 par value, $10.00
liquidation preference per share, one share authorized,
issued and outstanding, representing the voting rights
of 5.1 million, 4.9 million, and 5.2 million outstanding
exchangeable shares, respectively - - -
Common stock $1.00 par value, 1.0 billion shares
authorized; 405.4 million shares, 383.7 million shares,
and 405.1 million shares issued, respectively 405,403 383,683 405,114
Additional paid-in capital 1,847,263 1,651,715 1,845,222
Deferred compensation (11,933) - (12,265)
Treasury stock at cost; 14.2 million shares, 6.2 million
shares, and 14.3 million shares, respectively (494,007) (207,695) (495,347)
Retained earnings 605,362 504,755 625,197
Accumulated other comprehensive loss (225,760) (242,810) (197,898)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,127,108 2,090,428 2,170,803
- -----------------------------------------------------------------------------------------------------------------------------
$4,866,910 $4,248,275 $5,147,385
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 13.
2
<PAGE>
Mattel, Inc. and Subsidiaries
Supplementary 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 $878,959 $884,500
Cost of sales 440,462 444,612
- ---------------------------------------------------------------------------------------------------------------
Gross Profit 438,497 439,888
Advertising and promotion expenses 116,759 119,175
Other selling and administrative expenses 259,494 242,092
Amortization of intangibles 23,009 49,600
Charge for incomplete technology - 40,000
Restructuring and other charges 3,889 15,230
Interest expense 29,130 23,094
Other income, net (4,038) (2,147)
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 10,254 (47,156)
Provision for income taxes 5,205 8,801
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) 5,049 (55,957)
Less: preferred stock dividend requirements 1,990 1,990
- ---------------------------------------------------------------------------------------------------------------
Net Income (Loss) Applicable to Common Shares $ 3,059 $(57,947)
===============================================================================================================
Basic Income (Loss) Per Common Share
Net income (loss) $ 0.01 $ (0.15)
===============================================================================================================
Weighted average number of common shares 396,480 376,364
===============================================================================================================
Diluted Income (Loss) Per Common Share
Net income (loss) $ 0.01 $ (0.15)
===============================================================================================================
Weighted average number of common and common
equivalent shares 422,264 376,364
===============================================================================================================
Dividends Declared Per Common Share $ 0.08 $ 0.07
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 13.
3
<PAGE>
Mattel, Inc. and Subsidiaries
Supplementary 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 income (loss) $ 5,049 $ (55,957)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Noncash restructuring and integration charges - 4,000
Depreciation 48,208 44,585
Amortization 23,541 49,965
Charges for incomplete technology - 40,000
Increase (decrease) from changes in assets and liabilities:
Accounts receivable 54,930 109,167
Inventories (14,736) (107,886)
Prepaid expenses and other current assets (19,227) (5,441)
Accounts payable, accrued liabilities and income taxes payable (357,512) (355,605)
Other, net (13,727) (4,012)
--------- ---------
Net cash flows used for operating activities (273,474) (281,184)
--------- ---------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds (27,218) (26,045)
Purchases of other property, plant and equipment (20,522) (44,989)
Proceeds from sale of investments 7,218 -
Payment for acquisitions, net of cash acquired - (128,029)
Proceeds from sale of property, plant and equipment 3,291 11,379
Software development costs (28,000) (6,156)
Other, net (502) (2,695)
--------- ---------
Net cash flows used for investing activities (65,733) (196,535)
--------- ---------
Cash Flows From Financing Activities:
Short-term borrowings, net 135,950 702
Proceeds from issuance of special warrants - 134,346
Payments of long-term debt (330) (6,266)
Exercise of stock options including related tax benefit 3,854 104,642
Purchase of treasury stock - (32,339)
Payment of dividends on common and preferred stock (22,952) (24,521)
Other, net (771) (3,329)
--------- ---------
Net cash flows from financing activities 115,751 173,235
Effect of Exchange Rate Changes on Cash (3,679) (4,115)
--------- ---------
(Decrease) in Cash (227,135) (308,599)
Cash at Beginning of Period 469,213 883,903
Effect of Broderbund's excluded results - 1,348
--------- ---------
Cash at End of Period $ 242,078 $ 576,652
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
Consolidated results for all periods presented have been restated retroactively
for the effects of the May 1999 merger with Learning Company, accounted for as a
pooling of interests. See Note 13.
4
<PAGE>
Mattel, Inc. and Subsidiaries
Notes to Supplementary Consolidated Financial Information
1. The accompanying unaudited supplementary consolidated financial statements
and related disclosures have been prepared in accordance with generally
accepted accounting principles applicable to interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments considered necessary for a fair
presentation of Mattel, Inc. and its subsidiaries' ("the Company") financial
position and interim results as of and for the periods presented have been
included. Financial data for all periods presented reflect the retroactive
effect of the merger, accounted for as a pooling of interests, with The
Learning Company, Inc. consummated in May 1999 (see Note 13). Certain
amounts in the financial statements for prior periods have been reclassified
to conform with the current period's presentation. Because the Company's
business is seasonal, results for interim periods are not necessarily
indicative of those which may be expected for a full year.
2. The financial information included herein should be read in conjunction with
the Company's consolidated financial statements and related notes in its
1998 Annual Report to Stockholders filed on Forms 10-K and 10-K/A and the
Company's supplementary consolidated financial statements and related notes
for the years ended December 31, 1998, 1997 and 1996 filed on Form 8-K on
June 11, 1999.
3. Accounts receivable are shown net of allowances of $135.9 million (March 31,
1999), $73.0 million (March 31, 1998), and $125.0 million (December 31,
1998).
4. Inventories are comprised of the following:
<TABLE>
<CAPTION>
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and work in progress $ 64,700 $ 59,213 $ 48,473
Finished goods 582,859 518,389 595,797
- -----------------------------------------------------------------------------------------------------------------------------
$647,559 $577,602 $644,270
=============================================================================================================================
</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 $1,432,091 $647,000 $1,335,183
Other 23,736 123,238 149,451
- ------------------------------------------------------------------------------------------------------------------------------
$1,455,827 $770,238 $1,484,634
=============================================================================================================================
</TABLE>
5
<PAGE>
6. Senior notes include the following:
<TABLE>
<CAPTION>
(In thousands) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5-1/2% due 2000 $200,955 $287,650 $200,955
6-3/4% due 2000 100,000 100,000 100,000
6% due 2003 150,000 - 150,000
6-1/8% due 2005 150,000 - 150,000
- -----------------------------------------------------------------------------------------------------------------------------
$600,955 $387,650 $600,955
=============================================================================================================================
</TABLE>
7. Comprehensive (loss) income is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
-------------------------------------
March 31, March 31,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ 5,049 $(55,957)
Unrealized (loss) gain on securities (3,876) 161
Currency translation adjustments (23,986) (32,505)
- ------------------------------------------------------------------------------------------------
Total comprehensive (loss) income $(22,813) $(88,301)
================================================================================================
</TABLE>
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>
Income taxes $23,376 $57,904
Interest 20,886 8,316
- -------------------------------------------------------------------------------------------------------------------
</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 income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
and exchangeable shares outstanding during each period. Earnings available
to common stockholders represent reported net income (loss) less preferred
stock dividend requirements.
Diluted income (loss) per common share is computed by dividing diluted
earnings available to common stockholders by the weighted average number of
common, exchangeable and common equivalent shares outstanding during each
period. The calculation of common equivalent shares assumes the exercise of
dilutive stock options and warrants, net of assumed treasury share
repurchases at average market prices, and conversion of dilutive preferred
stock and convertible debt, as applicable. Diluted earnings available to
common stockholders represent earnings available to common stockholders plus
preferred stock dividend requirements and interest savings resulting from
the assumed conversion of dilutive securities. Diluted earnings per share
presented for the 1998 first quarter is the same as basic earnings per share
due to the Company's net loss position. Premium price stock options totaling
18.7 million, Series C preferred stock and convertible debt were excluded
from the calculation of diluted earnings per share in the 1999 first quarter
because they were anti-dilutive.
6
<PAGE>
11. In the 1998 fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
-------------------------------------------
and Related Information. This statement supersedes Statement of Financial
-----------------------
Accounting Standards No. 14, Financial Reporting for Segments of a Business
----------------------------------------------
Enterprise, replacing the "industry segment" approach with the "management"
----------
approach. The management approach designates the internal organization that
is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. This
statement requires disclosure of certain information by reportable segment,
geographic area and major customer.
The table below presents information about segment revenues, operating
profit and assets. The Company's reportable segments are separately managed
business units and include toy marketing, toy manufacturing, and consumer
software sales and development. The toy marketing segment is divided on a
geographic basis between domestic and international. The domestic toy
segment is further divided into USA Toys, Fisher-Price/Tyco Preschool and
Other. USA Toys principally sells products in the Girls, Entertainment and
Wheels categories, while Fisher-Price/Tyco Preschool sells principally
Infant and Preschool products. The Other toy segment is principally involved
in selling specialty products in the Girls category. The international toy
segment sells products in all categories. The consumer software segment is
comprised of educational and entertainment products developed and sold by
Learning Company on a worldwide basis. The Company's toy manufacturing
segment, Operations, manufactures toy products, which are sold to the
marketing segments based on intercompany transfer prices. Such prices are
based on manufacturing costs plus a profit margin. Toy segment revenues do
not include sales adjustments such as trade discounts and other allowances.
However, such adjustments are included in the determination of segment
profit from operations. Segment profit from operations represents income
before restructuring and other charges, interest expense, and provision for
income taxes. The consolidated total profit from operations presented in the
following tables represents income before income taxes as reported in the
supplementary consolidated statements of operations. The segment assets are
comprised of accounts receivable and inventories, net of applicable reserves
and allowances.
7
<PAGE>
<TABLE>
<CAPTION>
Revenues
From Profit/(Loss)
External Intersegment From Segment
(In thousands) Customers Revenues Operations Assets
- ----------------------------------------------------------------------------------------------------------
March 31, 1999
<S> <C> <C> <C> <C>
Marketing
Domestic:
USA Toys $319,241 $ - $ 18,937 $ 561,396
Fisher-Price/Tyco Preschool 140,323 - (350) 255,357
Other segments 44,383 - (6,710) 75,525
International 237,636 - (13,930) 503,576
Learning Company 186,843 - 43,423 268,547
Operations - 190,183 21,658 79,006
-------- --------- --------- ----------
Segment total 928,426 190,183 63,028 1,743,407
Elimination of intersegment sales - (190,183) - -
Sales adjustments (49,467) - - -
Restructuring and other charges - - (3,889) -
Interest expense - - (29,130) -
Corporate and other - - (19,755) (26,842)
-------- --------- --------- ----------
Consolidated total $878,959 $ - $ 10,254 $1,716,565
======== ========= ========= ==========
March 31, 1998
Marketing
Domestic:
USA Toys $331,579 $ - $ 43,651 $ 651,052
Fisher-Price/Tyco Preschool 183,270 - 11,483 308,228
International 235,619 - (7,529) 511,678
Learning Company 179,336 - (42,980) 151,912
Operations 992 293,109 24,619 73,912
-------- --------- --------- ----------
Segment total 930,796 293,109 29,244 1,696,782
Elimination of intersegment sales - (293,109) - -
Sales adjustments (46,296) - - -
Restructuring and other charges - - (15,230) -
Interest expense - - (23,094) -
Corporate and other - - (38,076) (25,341)
-------- --------- --------- ----------
Consolidated total $884,500 $ - $ (47,156) $1,671,441
======== ========= ========= ==========
</TABLE>
8
<PAGE>
The toy marketing segments sell a broad variety of children's toy products,
which are grouped into four major categories: Girls, Infant and Preschool,
Entertainment and Wheels. Learning Company is a leading publisher of consumer
software for the home personal computer. The table below presents revenues
from external customers by category:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------
March 31, March 31,
(In thousands) 1999 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)
- ----------------------------------------------------------------------------------------
Toy category 692,116 705,164
Learning Company 186,843 179,336
- ----------------------------------------------------------------------------------------
Consolidated total $878,959 $884,500
========================================================================================
</TABLE>
12. During 1998, the Company acquired Pleasant Company, Mindscape Inc., Bluebird
Toys PLC and Sofsource, Inc., each of which were accounted for using the
purchase method of accounting. The results of operations of the acquired
companies have been included in the Company's supplementary consolidated
financial statements from their respective dates of acquisition.
The unaudited pro forma results of operations for 1998 acquisitions
accounted for using the purchase method of accounting for the three-month
period ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Acquired Pro Forma
(In thousands, except per share data) Mattel Companies Combined
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $884,500 $ 62,418 $ 946,918
Loss before extraordinary item (55,957) (66,235) (122,192)
Net loss (55,957) (66,235) (122,192)
Basic loss per share (0.15) (0.32)
Diluted loss per share (0.15) (0.32)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amounts shown for acquired companies assumes that the acquisitions of
Pleasant Company, Mindscape, Inc., Bluebird Toys PLC, and Sofsource, Inc.
occurred on January 1, 1998. Pro forma adjustments have been made to reflect
the amortization of intangible assets and goodwill capitalized as a result
of the acquisitions, incremental interest expense that would have been
incurred as a result of financing the acquisition of Pleasant Company as of
January 1, 1998, and elimination of intercompany sales and margins related
to the acquisition of Bluebird Toys PLC.
9
<PAGE>
13. Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998,
a merger was consummated between Mattel and Learning Company on May 13,
1999. The stock-for-stock transaction was approved by the stockholders of
both companies, after which Learning Company was merged with and into
Mattel, with Mattel being the surviving corporation. Each share of Learning
Company Series A Preferred Stock was converted into 20 shares of Learning
Company common stock just prior to the consummation of the merger. According
to the merger agreement, each outstanding share of Learning Company common
stock was then converted into the right to receive 1.2 shares of Mattel
common stock. As a result, approximately 126 million Mattel common shares
were issued in exchange for all shares of Learning Company common stock
outstanding as of the merger date. The outstanding share of Learning Company
special voting stock was converted into the right to receive one share of
Mattel Special Voting Preferred Stock. Each outstanding exchangeable non-
voting share of Learning Company's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but is now exchangeable into the right
to receive 1.2 shares of Mattel common stock.
This transaction has been accounted for as a pooling of interests, and
accordingly, financial information for periods prior to the merger reflect
retroactive restatement of the companies' combined financial position and
operating results. For periods preceding the merger, there were no material
intercompany transactions which required elimination from the combined
consolidated results of operations and there were no adjustments necessary
to conform the accounting practices of the two companies.
Selected financial information for the combining entities included in the
supplementary consolidated statements of operations for the three-month
periods ended March 31, is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------
March 31, March 31,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales
Mattel $692,116 $705,164
Learning Company 186,843 179,336
- ---------------------------------------------------------------------------------------------------
Combined $878,959 $884,500
===================================================================================================
Net income (loss)
Mattel $(17,856) $ 12,669
Learning Company (a) 22,905 (68,626)
- ---------------------------------------------------------------------------------------------------
Combined $ 5,049 $(55,957)
===================================================================================================
</TABLE>
(a) The (benefit) provision for income taxes has been adjusted by $(0.6)
million and $3.7 million in 1998 and 1997, respectively, to reflect the
reduction of valuation allowances established in Learning Company's
historical financial statements resulting in the recognition of estimated
benefits of net operating losses incurred by Learning Company.
10
<PAGE>
Mattel, Inc. and Subsidiaries
Supplementary Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary Statement
Certain expectations and projections regarding the future performance of Mattel,
Inc. and its subsidiaries ("the Company") discussed herein are forward-looking
and are made under the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These expectations and projections are based on
currently available competitive, financial, and economic data along with the
Company's operating plans and are subject to certain future events and
uncertainties. Forward-looking statements can be identified by the use of
forward-looking terminology, such as may, will, should, expect, anticipate,
estimate, continue, plans, intends or other similar terminology. Management
cautions you that the following factors, among others, could cause the Company's
actual consolidated results of operations and financial position in 1999 and
thereafter to differ significantly from those expressed in forward-looking
statements:
Marketplace Risks
- - Increased competitive pressure, both domestically and internationally, which
may affect the sales of the Company's products
- - Significant changes in the buying patterns of major customers, such as the
recent shift by some retailers to just-in-time inventory management, which
may limit the Company's ability to accurately forecast reorders or cause a
decrease in sales after related expenses have already been incurred
- - Dependence on the timely development, introduction and customer acceptance of
new products, which may affect the Company's ability to successfully
redesign, restyle and extend existing core products and product lines and
successfully bring new products to market
- - Possible weaknesses in economic conditions, both domestically and
internationally, which may affect the sales of the Company's products and the
costs associated with manufacturing and distributing these products
Financial Considerations
- - Currency fluctuations, which may affect the Company's reportable income
- - Significant changes in interest rates, both domestically and internationally,
which may affect the Company's cost of financing both its operations and
investments
Merger-Related Risks
- - Difficulty integrating the operations of The Learning Company, Inc. and its
subsidiaries ("Learning Company") into Mattel (together with its subsidiaries
"Mattel") following the May 1999 merger, which may impede the Company's
ability to achieve savings or operating synergies from the merger
11
<PAGE>
Year 2000 Compliance
- - Potential inability of computer systems or software products used by the
Company and/or its customers and suppliers to properly recognize and process
date-sensitive information beyond January 1, 2000, which may result in an
interruption in normal business operations of the Company, its suppliers and
customers
- - Potential inability of software products sold by the Company to properly
recognize and process date-sensitive information beyond January 1, 2000,
which may result in increased costs, lost sales or other negative
consequences resulting from customer dissatisfaction, including litigation or
other claims for damages
Other Risks
- - Inability to achieve cost savings expected as part of restructuring
activities, which may result in higher than expected costs following such
restructurings
- - Development of new technologies, including the Internet, which may create new
risks to the Company's ability to protect its intellectual property rights
- - Changes in laws or regulations, both domestically and internationally,
including those affecting consumer products, environmental activities or
trade restrictions, which may lead to increased costs or interruption in
normal business operations of the Company
- - Adverse results of litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in normal business
operations of the Company
- - Other factors that may be described from time to time in the Company's
filings with the Securities and Exchange Commission
Summary
You should read this discussion in conjunction with the Company's supplementary
consolidated financial statements included herein. This Supplementary
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the accompanying supplementary consolidated financial statements
have been prepared to reflect the retroactive effect of Mattel's merger with
Learning Company, consummated in May 1999. The merger was accounted for as a
pooling of interests, which means that for accounting and financial reporting
purposes, Mattel's consolidated financial statements have been restated to
present the combined companies' financial position and results of operations for
each period presented. This discussion relates to the Company's financial
position and results of operations through March 31, 1999 and other than giving
retroactive effect to the merger, does not reflect any subsequent events. As
used herein, any reference to the "Company" reflects the combined Mattel and
Learning Company results. Any reference to "Mattel" or "Learning Company"
reflects the individual activities of either Mattel or Learning Company,
respectively. Unless the context clearly indicates otherwise, all financial
results described herein reflect the combined Mattel and Learning Company
results.
The Company designs, manufactures, and markets a broad variety of children's
products on a worldwide basis through both sales to retailers and direct to
consumers. Additionally, the Company develops and markets consumer software for
home personal computers. The Company's business is dependent in great part on
its ability each year to redesign, restyle and extend existing core products and
product lines, to design and develop innovative new products and product lines
and to expand its marketing capability.
The Company plans to continue to focus on its portfolio of brands that have
fundamental play patterns and have historically had worldwide appeal, have been
sustainable, and have delivered consistent profitability. The Company's
portfolio of brands can be grouped in the following categories:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
Fashion Magic(R), American Girl(R), Cabbage Patch Kids(R), and Polly Pocket(R)
Infant and Preschool - including Fisher-Price(R), Disney preschool and plush,
Power Wheels(R), Sesame Street(R), See `N Say(R), Magna Doodle(R), View-
Master(R), and Blue's Clues(R)
Boys - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and
Tyco(R) Radio Control
Entertainment - including Disney, Nickelodeon(R), games, and puzzles
Consumer Software - including Reader Rabbit(R), Carmen Sandiego(TM), The
Oregon Trail(R), Riven(R), The ClueFinders(TM), Kid Pix(R), CyberPatrol(R) and
Family Tree Maker(R)
12
<PAGE>
Segment Information
The Company's reportable segments are separately managed business units and
include: toy marketing, toy manufacturing, and consumer software sales and
development. The toy marketing segment is divided on a geographic basis between
domestic and international. The domestic toy segment is further divided into USA
Toys, Fisher-Price/Tyco Preschool and Other. USA Toys principally sells products
in the Girls, Boys, and Entertainment categories, while Fisher-Price/Tyco
Preschool principally sells infant and preschool products. The Other toy segment
is principally involved in selling specialty products in the Girls category. The
international toy segment sells products in all categories. The consumer
software segment is comprised of educational and entertainment products
developed and sold by Learning Company on a worldwide basis. The Company's toy
manufacturing segment, Operations, manufactures toy products, which are sold to
the toy marketing segments. Financial information regarding the Company's
segments can be found in Note 11 to the supplementary consolidated financial
statements.
Results of Operations
The Company's business is seasonal, and, therefore, results of operations are
comparable only with corresponding periods. The following is a percentage
analysis of operating results:
<TABLE>
<CAPTION>
For the
Three Months Ended
---------------------------------
March 31, March 31,
1999 1998
- --------------------------------------------------------------------------------------------------
Net sales 100% 100%
==================================================================================================
<S> <C> <C>
Gross profit 49.9% 49.7%
Advertising and promotion expenses 13.3 13.4
Other selling and administrative expenses 29.5 27.4
Amortization of intangibles 2.6 5.6
Charge for incomplete technology - 4.5
Restructuring and other charges 0.4 1.7
Other income, net (0.4) (0.2)
- --------------------------------------------------------------------------------------------------
Operating profit (loss) 4.5 (2.7)
Interest expense 3.3 2.6
- --------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1.2% (5.3)%
==================================================================================================
</TABLE>
Net income for the first quarter of 1999 was $5.0 million or $0.01 per share as
compared to a net loss of $56.0 million or $0.15 per share in the first quarter
of 1998. Profitability in the first quarter of 1999 was negatively impacted by
higher amortization of intangibles and interest costs related to the Company's
1998 acquisitions. First quarter 1998 results of operations were negatively
impacted by a $40.0 million in-process technology write-off related to the
acquisition of Mindscape, Inc. in March 1998. Net sales in the first quarter of
1999 decreased slightly to $879.0 million, from $884.5 million in 1998. Sales
in the Girls category increased 14% largely due to $44.4 million in incremental
sales of American Girl(R) resulting from the July 1998 Pleasant Company
acquisition. Sales of Barbie(R) products increased 3% worldwide and 11%
domestically. Within the Boys category, sales of Wheels products increased 27%,
demonstrating
13
<PAGE>
continued strength across Hot Wheels(R), Matchbox(R), and Tyco(R) Radio Control.
Sales of Entertainment products, including Disney and Nickelodeon(R), increased
8%. Sales in the Infant and Preschool category declined 23%, largely due to last
year's success of `Tickle Me Elmo.' This decrease was partially offset by a 9%
increase in sales of core Fisher-Price products. Sales of Learning Company
consumer software products increased 4%, mainly due to the acquisition
of Mindscape, Inc. and the launch of several new products such as
Reader Rabbit's(R) Complete Learn to Read System, All Star Typing(TM) 9-12,
and Bodyworks(R).
Sales to customers within the US decreased 1% and accounted for 73% of
consolidated sales in both the 1999 and 1998 first quarter. Sales to customers
outside the US increased 1% from the year ago quarter.
Gross profit, as a percentage of net sales, was 49.9% in first quarter of 1999
compared to 49.7% in 1998. As a percentage of net sales, advertising and
promotion expenses fell slightly from 13.4% in 1998 to 13.3% in 1999. Other
selling and administrative expenses increased from 27.4% to 29.5%. This increase
is being addressed through a business realignment, which we expect will bring
the Company's overhead costs back in line with 1997 levels. The planned
realignment is expected to include the closure of some of the Company's
facilities and a workforce reduction affecting over 3,000 positions, or more
than 10% of the Company's total employment. Amortization of intangibles
decreased by $26.6 million, mainly as a result of full amortization of
intangibles related to the acquisitions of Minnesota Educational Computing
Corporation and the Former Learning Company, partially offset by amortization of
intangibles resulting from the 1998 acquisitions of Pleasant Company, Sofsource,
Inc., Bluebird Toys PLC (`Bluebird'), and Mindscape, Inc.
Interest expense increased $6.0 million primarily due to increased short- and
long-term borrowings to finance the Company's 1998 acquisitions.
Financial Position
The Company's cash position as of March 31, 1999 was $242.1 million compared to
$576.7 million as of the first quarter 1998. The $334.6 million decline was
mainly due to cash consideration paid in connection with the 1998 acquisitions
of Pleasant Company, Mindscape, Inc., and Bluebird, partially offset by the
issuance of $300.0 million in senior notes and profitable 1998 operating
results. Cash decreased by $227.1 million since December 31, 1998 primarily due
to funding of operating activities. Accounts receivable, net declined by $24.8
million from the year ago quarter and $81.0 million from year-end. Inventory
balances increased $70.0 million from the 1998 quarter end, mainly due to the
inventory acquired as part of the Company's acquisitions. Property, plant and
equipment, net grew $115.0 million from the first quarter of 1998 mainly due to
assets acquired as part of acquisitions, and investments in the expansion of the
Company's toy manufacturing facilities located in Mexico. Intangibles, net
increased $685.6 million, compared to the year-ago quarter, to $1.46 billion due
to the Pleasant Company, Bluebird, and Sofsource, Inc. acquisitions.
14
<PAGE>
Short-term borrowings increased $271.2 million compared to the 1998 quarter end
due to cash consideration paid in connection with the 1998 acquisitions.
Compared to 1998 year end, short-term borrowings increased $125.4 million to
support seasonal needs. Current portion of long-term liabilities increased $9.1
million over the 1998 quarter end, primarily due to the reclassification of
$30.0 million in medium-term notes payable in 1999 from long-term debt.
Seasonal financing needs for the next twelve months are expected to be satisfied
through internally generated cash, issuance of commercial paper, issuance of
long-term debt, and use of the Company's various short-term bank lines of
credit.
A summary of the Company's capitalization is as follows:
<TABLE>
<CAPTION>
(In millions) March 31, 1999 March 31, 1998 Dec. 31, 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Senior notes $ 601.0 17% $ 387.7 12% $ 601.0 17%
Medium-term notes 540.5 16 520.5 16 540.5 16
Other long-term debt obligations 42.8 1 43.4 1 43.0 1
- ----------------------------------------------------------------------------------------
Total long-term debt 1,184.3 34 951.6 29 1,184.5 34
Other long-term liabilities 155.4 5 148.2 5 149.1 4
Stockholders' equity 2,127.1 61 2,090.4 66 2,170.8 62
- ----------------------------------------------------------------------------------------
$3,466.8 100% $3,190.2 100% $3,504.4 100%
========================================================================================
</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. The Company expects to satisfy its future long-term capital
needs through the retention of corporate earnings and the issuance of long-term
debt instruments. Stockholders' equity increased $36.7 million since March 31,
1998, primarily due to profitable 1998 operating results and reissuance of
treasury stock for the exercise of nonqualified stock options by the Company's
employees, partially offset by the treasury stock purchases and dividend
declarations on common and preferred stock. Stockholder's equity declined $43.7
million from year end 1998 as a result of dividend declarations on common and
preferred stock.
Business Combination and Related Integration and Restructuring Charge
Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a
merger was consummated between Mattel and Learning Company on May 13, 1999. The
stock-for-stock transaction was approved by the stockholders of both companies,
after which Learning Company was merged with and into Mattel, with Mattel being
the surviving corporation. Each share of Learning Company Series A Preferred
Stock was converted into 20 shares of Learning Company common stock just prior
to the consummation of the merger. According to the merger agreement, each
outstanding share of Learning Company common stock was then converted into the
right to receive 1.2 shares of Mattel common stock. As a result, approximately
126 million Mattel common shares will be issued in exchange for all shares of
Learning Company common stock outstanding as of the merger date. The outstanding
share of Learning
15
<PAGE>
Company special voting stock was converted into the right to receive one share
of Mattel Special Voting Preferred Stock. Each outstanding exchangeable non-
voting share of Learning Company's Canadian subsidiary, Softkey Software
Products Inc., remains outstanding, but is now exchangeable into the right to
receive 1.2 shares of Mattel common stock.
In April 1999, Mattel announced that as a result of the May 1999 merger with
Learning Company and a planned realignment of Mattel's operations to reduce
overhead costs, the Company expects to incur a pre-tax charge of approximately
$300 million to $350 million against results of operations during the second
quarter of 1999. Mattel also announced that the planned realignment was
expected to include the closure of some of Mattel's facilities and a
workforce reduction affecting over 3,000 positions, or more than 10% of
Mattel's employees at that time. The planned realignment will consist of
consolidating some manufacturing and distribution operations, eliminating
duplicative facilities, and terminating various distributor and licensing
arrangements. Approximately $75 million of the charge is expected to be related
to merger transaction costs, approximately $90 million is expected to be related
to merger integration costs, and approximately $135 million to $185 million is
expected to be related to Mattel restructuring costs. The Company expects to
fund this restructuring through existing cash balances and internally generated
cash from operations. The Company expects the combined actions to result in cost
savings of approximately $50 million in 1999 and at least $400 million over the
following three years. However, the amount of expected cost savings are
preliminary estimates and the Company cannot assure that its actions will result
in these cost savings.
New Internet Venture
On April 15, 1999, the Company announced that it expects to initially spend
approximately $50 million to launch an Internet venture, which is expected to
result in the creation of a new subsidiary later this year, a portion of which
may be offered to the public. The Company expects that it will be able to offset
a portion of its investment in the Internet venture with the 1999 cost savings
from the realignment discussed above. The Company's goal is to create a premier
online destination and E-commerce site to better serve children and their
families. The Company's strategy to reach this goal is premised on attracting
consumers to its sites by bringing together the branded proprietary content of
both Mattel and Learning Company at one "Mattel.com" Web destination. The
Company expects to have over 80 websites and a database of approximately 25
million consumers.
Foreign Currency Risk
The Company's results of operations and cash flows can be impacted by exchange
rate fluctuations. To limit the exposure associated with exchange rate
movements, the Company enters into foreign currency forward exchange contracts
primarily to hedge its purchase of inventory, sales and other intercompany
transactions denominated in foreign currencies. The Company's results of
operations can also be affected by the translation of foreign revenues and
earnings into US dollars.
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Market risk exposures exist with respect to the settlement of foreign currency
transactions during the year because currency fluctuations cannot be predicted
with certainty. The Company seeks to mitigate its exposure to market risk by
monitoring its currency exchange exposure for the year and partially or fully
hedging such exposure. In addition, the Company manages its exposure through the
selection of currencies used for foreign borrowings and intercompany invoicing.
The Company does not trade in financial instruments for speculative purposes.
Year 2000 Update
Many currently installed computer systems and software products, including
several used by the Company are coded to accept only two-digit (rather than
four-digit) entries in the date code field used to define the applicable year.
In such instances, the first two characters are assumed to be "19". Beginning in
the year 2000 or perhaps earlier if referencing a date in the year 2000, such
computer systems and software products may recognize a date using "00" as the
year 1900, rather than the year 2000, which could result in miscalculations or
system failures. To address the year 2000 issue, in early 1998 Mattel
established a project team and initiated a comprehensive plan that is designed
to assess, remediate and test Mattel's internal systems, hardware and processes,
including key operational, manufacturing and financial systems. The progress of
this plan is continually monitored and regularly reported to management. In
addition, Mattel's board of directors is regularly informed about the year 2000
issue both generally and as it may affect Mattel's business.
Mattel's internal year 2000 project team oversees all aspects of implementing
the plan. The team is comprised of staff members from the information systems
department having the requisite knowledge of Mattel's computer systems,
including all technical aspects of the systems. Key user group designees
from business areas are included on each system team, which is guided by a
central project team. Mattel has not engaged outside consultants, technicians
or other external resources to assist in formulating and implementing the
program.
Mattel's plan adheres to a multi-step process that includes five distinct phases
of activity: (1) awareness; (2) inventory and risk assessment; (3) code and
system modification; (4) testing; and (5) business interruption and contingency
planning.
Under the first two phases of the plan, Mattel has inventoried and evaluated all
operational, manufacturing and financial systems. This inventory included all
software systems, computer hardware, facilities, and production equipment
containing or depending upon a computer chip. As a result of such evaluation,
Mattel established detailed plans and action steps required to address all
aspects of the year 2000 issue, including all code and system modifications
(phase 3). Mattel completed the awareness, inventory and code change phases of
the plan as scheduled prior to December 1998. Critical system verification and
testing (phase 4) for Mattel is expected to be complete by July 1999.
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Mattel initiated formal communications with each of its significant suppliers
and customers to determine the extent to which they are addressing the year 2000
issue and the effect on its business should those parties fail to adequately
address the issue. To date, Mattel has received responses from the majority of
the initial contacts. These responses have been positive and support the
overall initiatives toward achieving year 2000 compliance. Mattel is actively
following-up with those customers and suppliers failing to reply to the initial
inquiry.
Learning Company was acquired by Mattel in May 1999 and therefore followed its
own year 2000 readiness plan prior to the merger. For purposes of this
Supplementary Management's Discussion and Analysis of Financial Condition and
Results of Operations which relates to the Company's financial condition and
results of operations through March 31, 1999, after giving effect to the merger,
the following discussion with respect to Learning Company's year 2000 plan and
readiness describes the status of such plan and its uncertainties through March
31, 1999. The Company is in the process of evaluating Learning Company's year
2000 plan and incorporating it into its own plan. The Company anticipates
describing the results of this effort in the future filings.
As of March 31, 1999, Learning Company was in the assessment stage of its plan.
For certain known critical internal systems, Learning Company had completed the
assessment phase of its plan. Learning Company had not yet determined a date by
which it expected to complete implementation for all the targeted areas, but it
intended to complete such implementation in advance of January 1, 2000. Learning
Company had been taking, and expected to continue to take actions, intended to
resolve year 2000 issues through planned replacement or upgrades of its internal
computer equipment and software systems.
Learning Company believed that a substantial portion of its remediation and
implementation efforts with respect to internal systems would be conducted in
connection with the integration of the businesses it acquired in 1998. In 1998
Learning Company acquired Mindscape, Inc., Sofsource, Inc., P.F. Magic, Inc.,
Broderbund, and Palladium Interactive, Inc. None of these companies had made
substantial progress in its own year 2000 readiness plans with respect to
internal systems or third parties. While Learning Company was in the process of
integrating these businesses into its year 2000 readiness plan, the addition of
these businesses complicated the Learning Company's year 2000 inventory,
assessment, remediation and implementation efforts. This effect is mitigated
somewhat as Learning Company intends in most instances to move, or in certain
cases has moved or is in the process of moving, most accounting, data
processing, telephone/PBX and other information technology processes of the
business to Learning Company's systems, which are to a greater extent already
year 2000 compliant.
The Company sells both Mattel and Learning Company software products as part of
its core businesses. All Mattel software products currently available for sale
to consumers and those products previously purchased by consumers are year 2000
compliant. Mattel software products manufactured for the Company by third-
parties under licensing agreements have been certified as year 2000 compliant by
such manufacturers.
Learning Company sold software products primarily for use in homes and schools,
and has sold over the last few years products that have since been discontinued
but may still be used by consumers. Additionally, products under development
were being designed to be year 2000 compliant. Learning Company was also in the
process of testing certain of its products sold in the past, for year 2000
compliance. Because Learning Company's products tend to have few time-sensitive
components, the resources necessary to test its products are not expected to be
significant. However, since Learning Company was still in the assessment phase
of its readiness plan with respect to products, it is difficult to estimate with
certainty the ultimate cost of its year 2000 plan with respect to products.
Contingency planning is being done on a worldwide basis by all business units.
Each business unit will concentrate on factors external to the Company which may
adversely impact their ability to conduct operations. Specifically, for those
locations where a high likelihood of a material failure exists, the Company will
establish revised procedures for managing operations, including identification
of alternate suppliers and vendors whose systems are year 2000 compliant.
Mattel's contingency plans (phase 5) will be developed during the first half of
1999 and will be complete by July 1999. A contingency plan for Learning Company
has not yet been developed, but contingency plans will be instituted at the
completion of Learning Company's assessment phase.
As of March 31, 1999, the Company has spent approximately $9 million and expects
to incur a total of approximately $13 million in connection with addressing the
year 2000 issue. These costs include approximately $1 million incurred by
Learning Company and a total of approximately $2 million expected to be incurred
by Learning Company. These costs are largely due to the use of internal
resources dedicated to achieving year 2000 compliance. Costs are charged to
expense as they are incurred. Work on the year 2000 issue has not delayed any
internal projects that would have a material effect on the Company's
consolidated financial position or results of operation. All costs of
addressing the year 2000 issue will be funded from internally generated cash.
While the Company is dedicating resources toward attaining year 2000 readiness,
there is no assurance that the Company will be successful in its efforts to
address all year 2000 issues. If all year 2000 issues are not properly
identified and assessed or the plan implemented timely, there can be no
assurance that the year 2000 issue will not materially adversely impact the
Company's results of operations, liquidity and financial position or adversely
affect the Company's relationships with customers, vendors or others. For
example, failure to achieve year 2000 readiness for the Company's internal
systems could delay its ability to manufacture and ship products or disrupt
customer service and technical support facilities. The Company also relies on
third parties such as manufacturing suppliers and vendors and large retail
customers. If these or other third parties experience year 2000 failures or
malfunctions there could be a material adverse impact on the Company's ability
to conduct ongoing operations. Additionally, the Company could incur increased
costs, lost sales or other negative consequences resulting from customer
dissatisfaction, including litigation if its products are not year 2000
compliant.
The above discussion regarding costs, risks and estimated completion dates for
the year 2000 is based on the Company's best estimates given information that is
available on March 31, 1999, and is subject to change. Actual results could
differ from these estimates.
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