<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-05647
---------
MATTEL, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Continental Boulevard, El Segundo, California 90245-5012
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (310) 252-2000
----------------------------
(Former name, former address and former fiscal year,
if changed since last report) None
--------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares outstanding of registrant's common stock, $1.00 par value,
(including 2,686,074 common shares issuable upon exchange of outstanding
exchangeable shares of Softkey Software Products Inc.) as of July 17, 2000:
426,370,635 shares
<PAGE>
PART I -- FINANCIAL INFORMATION
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, June 30, Dec. 31,
(In thousands) 2000 1999 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and short-term investments $ 129,693 $ 53,922 $ 247,354
Accounts receivable, net 1,057,388 1,064,066 1,001,972
Inventories 633,513 615,188 436,316
Prepaid expenses and other current assets 206,743 240,602 166,217
----------------------------------------------------------------------------------------------------------------------------
Total current assets 2,027,337 1,973,778 1,851,859
----------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment
Land 32,862 35,565 34,882
Buildings 258,777 279,074 270,185
Machinery and equipment 558,286 536,518 552,625
Capitalized leases 23,271 23,271 23,271
Leasehold improvements 70,972 45,039 74,812
----------------------------------------------------------------------------------------------------------------------------
944,168 919,467 955,775
Less: accumulated depreciation 445,121 401,647 422,142
----------------------------------------------------------------------------------------------------------------------------
499,047 517,820 533,633
Tools, dies and molds, net 179,596 192,640 191,158
----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 678,643 710,460 724,791
----------------------------------------------------------------------------------------------------------------------------
Other Noncurrent Assets
Intangible assets, net 1,165,459 1,219,482 1,200,622
Net investment in discontinued operations 378,571 509,353 461,986
Other assets 550,733 233,777 434,706
----------------------------------------------------------------------------------------------------------------------------
$4,800,743 $4,646,850 $4,673,964
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
June 30, June 30, Dec. 31,
(In thousands, except share data) 2000 1999 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $1,220,185 $ 658,719 $ 369,549
Current portion of long-term liabilities 2,708 133,344 3,173
Accounts payable 256,153 252,661 293,277
Accrued liabilities 397,265 566,356 714,633
Income taxes payable 163,397 90,718 184,789
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,039,708 1,701,798 1,565,421
-------------------------------------------------------------------------------------------------------------------------
Long-Term Liabilities
Senior notes 300,000 300,000 400,000
Medium-term notes 540,500 540,500 540,500
Mortgage note 42,042 42,701 42,380
Other 182,660 158,301 162,976
-------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,065,202 1,041,502 1,145,856
-------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
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 at June 30, 1999 - 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 2.2 million, 4.2 million, and 3.2 million outstanding
exchangeable shares, respectively - - -
Common stock $1.00 par value, 1.0 billion shares
authorized; 434.7 million shares, 426.0 million shares,
and 433.6 million shares issued, respectively 434,744 425,953 433,563
Additional paid-in capital 1,718,491 1,840,380 1,728,954
Treasury stock at cost; 11.2 million shares, 14.4 million
shares, and 12.0 million shares, respectively (337,437) (491,433) (361,825)
Retained earnings 159,695 361,501 401,642
Accumulated other comprehensive loss (279,660) (233,623) (239,647)
-------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,695,833 1,903,550 1,962,687
-------------------------------------------------------------------------------------------------------------------------
$4,800,743 $4,646,850 $4,673,964
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
---------------------- -----------------------
June 30, June 30, June 30, June 30,
(In thousands, except per share amounts) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $817,797 $ 802,271 $1,511,058 $1,490,586
Cost of sales 453,918 442,612 832,822 815,553
--------------------------------------------------------------------------------------------------------------
GROSS PROFIT 363,879 359,659 678,236 675,033
Advertising and promotion expenses 98,586 96,875 189,873 188,036
Other selling and administrative expenses 218,711 198,511 472,910 400,030
Amortization of intangibles 13,373 12,960 25,905 25,972
Restructuring and other charges (2,000) 293,100 (2,000) 293,100
Interest expense 35,945 27,614 60,301 52,472
Other (income) expense, net (9,026) 985 (15,399) 3,229
--------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 8,290 (270,386) (53,354) (287,806)
Provision (benefit) for income taxes 2,285 (59,405) (14,729) (64,195)
--------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 6,005 (210,981) (38,625) (223,611)
DISCONTINUED OPERATIONS (SEE NOTE 2)
Income (loss) from discontinued operations, net of taxes
of $1.9 million, $(53.0) million and $11.9 million,
respectively - 6,647 (126,606) 24,326
--------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 6,005 (204,334) (165,231) (199,285)
Less: preferred stock dividend requirements - 1,990 - 3,980
--------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 6,005 $(206,324) $ (165,231) $ (203,265)
==============================================================================================================
INCOME (LOSS) PER COMMON SHARE - BASIC
Income (loss) from continuing operations $ 0.01 $ (0.52) $ (0.09) $ (0.56)
Income (loss) from discontinued operations - 0.02 (0.30) 0.06
--------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.01 $ (0.50) $ (0.39) $ (0.50)
==============================================================================================================
Weighted average number of common shares 425,818 409,040 425,655 402,786
==============================================================================================================
INCOME (LOSS) PER COMMON SHARE - DILUTED
Income (loss) from continuing operations $ 0.01 $ (0.52) $ (0.09) $ (0.56)
Income (loss) from discontinued operations - 0.02 (0.30) 0.06
--------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.01 $ (0.50) $ (0.39) $ (0.50)
==============================================================================================================
Weighted average number of common and common
equivalent shares 427,782 409,040 425,655 402,786
==============================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.09 $ 0.09 $ 0.18 $ 0.17
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Mattel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the
Six Months Ended
---------------------------------
June 30, June 30,
(In thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(165,231) $(199,285)
Deduct: (loss) income from discontinued operations (126,606) 24,326
--------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (38,625) (223,611)
Adjustments to reconcile loss from continuing operations to net cash flows
from operating activities:
Noncash restructuring and integration charges - 48,094
Depreciation 96,561 92,329
Amortization 29,235 27,213
Increase (decrease) from changes in assets and liabilities:
Accounts receivable (69,396) (134,528)
Inventories (203,588) (52,522)
Prepaid expenses and other current assets (15,306) (7,797)
Accounts payable, accrued liabilities and income taxes payable (398,326) (206,402)
Other, net 6,985 3,974
--------------------------------------------------------------------------------------------------------------------------
Net cash flows used for operating activities of continuing operations (592,460) (453,250)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tools, dies and molds (43,343) (58,446)
Purchases of other property, plant and equipment (33,904) (43,628)
Proceeds from sale of other property, plant and equipment 4,254 2,241
Other, net 1,820 (13,993)
--------------------------------------------------------------------------------------------------------------------------
Net cash flows used for investing activities of continuing operations (71,173) (113,826)
--------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 851,523 536,303
Payment of senior note (100,000) -
Exercise of stock options including related tax benefit 8,935 9,689
Purchase of treasury stock - (16,975)
Payment of dividends on common and preferred stock (76,825) (49,826)
Other, net (307) (338)
--------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities of continuing operations 683,326 478,853
--------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR DISCONTINUED OPERATIONS (135,733) (65,730)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,621) (4,579)
--------------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND SHORT-TERM INVESTMENTS (117,661) (158,532)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 247,354 212,454
--------------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 129,693 $ 53,922
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Mattel, Inc. and Subsidiaries
Notes to Consolidated Financial Information
1. The accompanying unaudited consolidated financial statements and related
disclosures have been prepared in accordance with generally accepted
accounting principles applicable to interim financial information and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the
opinion of management, all adjustments considered necessary for a fair
presentation of Mattel, Inc. and its subsidiaries' ("Mattel") financial
position and interim results as of and for the periods presented have been
included. Certain amounts in the financial statements for prior periods have
been reclassified to conform with the current period's presentation. Because
Mattel's business is seasonal, results for interim periods are not
necessarily indicative of those which may be expected for a full year.
The financial information included herein should be read in conjunction with
Mattel's consolidated financial statements and related notes in its 1999
Annual Report to Stockholders filed on Form 10-K and its restated
consolidated financial statements and related notes for the years ended
December 31, 1999, 1998 and 1997 which reflect the reclassification of the
Consumer Software business as a discontinued operation filed on its Current
Report on Form 8-K dated July 6, 2000.
2. In May 1999, The Learning Company, Inc. ("Learning Company") was merged
with and into Mattel, with Mattel being the surviving corporation. This
transaction was accounted for as a pooling of interests.
On March 31, 2000, Mattel's board of directors resolved to sell its Consumer
Software segment, which is comprised primarily of the assets of Learning
Company. As a result of this decision, the Consumer Software segment is
being reported as a discontinued operation effective March 31, 2000, and the
consolidated financial statements have been reclassified to segregate the
net investment in and operating results of the Consumer Software segment.
Mattel expects to sell the Consumer Software segment by the end of 2000 and
expects to record a gain for accounting purposes upon disposal. Accordingly,
the net operating results of the Consumer software segment subsequent to
March 31, 2000 are being deferred until the disposal date.
On July 19, 2000, Mattel sold the CyberPatrol division of Learning Company
to JSB Software Technologies plc ("JSB"), a UK software company which is
listed on the London Stock Exchange, for a combination of JSB stock and
cash. CyberPatrol is a provider of internet filtering software products to
the education, home and corporate sectors. Mattel received an aggregate of
$40 million in cash from JSB and a third-party investment bank that
purchased approximately 1.3 million JSB shares from Mattel simultaneous with
the closing. Additionally, Mattel received approximately 1.4 million
restricted shares of JSB stock as part of this transaction.
6
<PAGE>
3. Accounts receivable are shown net of allowances of $25.1 million (June 30,
2000), $36.9 million (June 30, 1999), and $29.5 million (December 31, 1999).
4. Inventories are comprised of the following:
<TABLE>
<CAPTION>
(In thousands) June 30, 2000 June 30, 1999 Dec. 31, 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials and work in progress $ 67,416 $ 72,793 $ 41,452
Finished goods 566,097 542,395 394,864
-----------------------------------------------------------------------------------------------------------------------
$633,513 $615,188 $436,316
=======================================================================================================================
</TABLE>
5. Intangibles, net include the following:
<TABLE>
<CAPTION>
(In thousands) June 30, 2000 June 30, 1999 Dec. 31, 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $1,156,988 $1,209,345 $1,191,227
Other 8,471 10,137 9,395
-----------------------------------------------------------------------------------------------------------------------
$1,165,459 $1,219,482 $1,200,622
=======================================================================================================================
</TABLE>
6. Short-term borrowings include the following:
<TABLE>
<CAPTION>
(In thousands) June 30, 2000 June 30, 1999 Dec. 31, 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable $ 369,185 $ 58,719 $121,805
Commercial paper 851,000 600,000 247,744
-----------------------------------------------------------------------------------------------------------------------
$1,220,185 $658,719 $369,549
=======================================================================================================================
</TABLE>
7. Senior notes include the following:
<TABLE>
<CAPTION>
(In thousands) June 30, 2000 June 30, 1999 Dec. 31, 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6% due 2003 $150,000 $150,000 $150,000
6-1/8% due 2005 150,000 150,000 150,000
6-3/4% due 2000 - - 100,000
-----------------------------------------------------------------------------------------------------------------------
$300,000 $300,000 $400,000
=======================================================================================================================
</TABLE>
8. Comprehensive loss is as follows:
<TABLE>
<CAPTION>
For the Six Months Ended
-------------------------------------------
(In thousands) June 30, 2000 June 30, 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loss from continuing operations $ (38,625) $(223,611)
(Loss) income from discontinued operations (126,606) 24,326
------------------------------------------------------------------------------------------------------------
Net loss (165,231) (199,285)
Unrealized gain on securities:
Unrealized holding gains arising during the period 560 1,350
Less: reclassification adjustment for realized gains
included in net loss - (11,143)
Currency translation adjustments (40,573) (25,932)
------------------------------------------------------------------------------------------------------------
Comprehensive loss $(205,244) $(235,010)
============================================================================================================
</TABLE>
7
<PAGE>
9. Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
For the Six Months Ended
--------------------------------------------
(In thousands) June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash payments during the period:
Income taxes $29,417 $21,500
Interest 79,579 57,330
Noncash investing and financing activities during the period:
Issuance of common stock warrant $ 5,789 $ -
Common stock issued for acquisitions:
Settlement of earn-out agreements - 5,547
----------------------------------------------------------------------------------------------------------------------
</TABLE>
10. The board of directors declared cash dividends of $0.09 per common share in
both the second quarter of 2000 and 1999.
11. Basic income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares and common shares obtainable upon the exchange of the exchangeable
shares of Mattel's Canadian subsidiary, Softkey Software Products Inc.
("Softkey"), 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 shares, common shares obtainable upon the exchange of the
exchangeable shares of Softkey, and other common equivalent shares
outstanding during each period. The calculation of common equivalent shares
assumes the exercise of dilutive stock options and warrants, net of assumed
treasury share repurchases at average market prices, and conversion of
dilutive preferred stock and convertible debt, as applicable. Diluted
earnings available to common stockholders represent earnings available to
common stockholders less preferred stock dividend requirements. Dilutive
securities are included in the calculation of weighted average shares
outstanding for those periods in which Mattel recorded income from
continuing operations.
12. On July 5, 2000, Mattel completed an offering in Europe of Euro 200 million
aggregate principal amount of Notes due July 2002. Interest is payable
annually in July at the rate of 6.625%. Cash proceeds of approximately $191
million were received by Mattel and will be used for general corporate
purposes.
13. On July 17, 2000, Mattel entered into a $200.0 million senior unsecured term
loan which matures in July 2003. Interest will be charged at various rates
selected by Mattel, ranging from a LIBOR-based rate to the bank reference
rate. This term loan requires Mattel to meet financial covenants for
consolidated debt-to-capital and interest coverage consistent with those
required under Mattel's unsecured revolving credit agreement.
8
<PAGE>
14. 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 and toy manufacturing. The Toy
Marketing segment is divided on a geographic basis between domestic and
international. The domestic Toy Marketing segment is further divided into
US Girls, US Boys-Entertainment, US Infant & Preschool, and Other. The US
Girls segment includes brands such as Barbie(R), Polly Pocket(R) and
Cabbage Patch Kids(R). The US Boys-Entertainment segment includes products
in the Wheels and Entertainment categories. The US Infant & Preschool
segment includes Fisher-Price(R), Disney preschool and plush, Power
Wheels(R), Sesame Street(R) and other preschool products. The Other segment
principally sells specialty girls products, including American Girl(R),
which are sold through the direct marketing distribution channel. The
International Toy Marketing segment sells products in all toy categories.
The Toy Manufacturing segment manufactures toy products, which are sold to
the Toy 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 interest expense and taxes. The consolidated total profit
from operations presented in the following table represents income before
income taxes as reported in the consolidated statements of operations. The
segment assets are comprised of accounts receivable and inventories, net of
applicable reserves and allowances.
9
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
---------------------------------------------------------
June 30, June 30, June 30, June 30,
(In thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Toy Marketing:
US Girls $ 202,221 $ 175,859 $ 372,565 $ 330,864
US Boys-Entertainment 128,026 128,337 245,699 245,122
US Infant & Preschool 234,008 218,660 417,005 392,909
Other 43,849 44,220 92,651 99,582
International 262,594 287,825 482,828 523,861
Toy Manufacturing 395,865 297,198 729,626 487,381
---------------------------------------------------------------------------------------------------------
Segment total 1,266,563 1,152,099 2,340,374 2,079,719
Elimination of intersegment sales (395,865) (297,198) (729,626) (487,381)
Sales adjustments (52,901) (52,630) (99,690) (101,752)
---------------------------------------------------------------------------------------------------------
Net sales from continuing operations $ 817,797 $ 802,271 $1,511,058 $1,490,586
=========================================================================================================
OPERATING PROFIT (LOSS)
Toy Marketing:
US Girls $ 51,331 $ 39,068 $ 87,624 $ 68,123
US Boys-Entertainment (6,674) 294 (5,807) 1,359
US Infant & Preschool 15,045 13,680 20,863 16,515
Other (18,739) (15,915) (33,238) (23,690)
International (369) 5,635 (19,632) (5,695)
Toy Manufacturing 33,609 27,976 57,898 40,434
---------------------------------------------------------------------------------------------------------
Segment total 74,203 70,738 107,708 97,046
Restructuring and other charges 2,000 (293,100) 2,000 (293,100)
Executive severance and other
related charges - - (53,073) -
Interest expense (35,945) (27,614) (60,301) (52,472)
Corporate and other (31,968) (20,410) (49,688) (39,280)
----------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes $ 8,290 $ (270,386) $ (53,354) $ (287,806)
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ASSETS
June 30, June 30,
(In thousands) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Toy Marketing:
US Girls and US Boys-Entertainment * $ 589,104 $ 539,462
US Infant & Preschool 341,394 351,060
Other 101,541 98,088
International 569,550 620,487
Toy Manufacturing 103,700 90,168
-------------------------------------------------------------------------------------------
Segment total 1,705,289 1,699,265
Corporate and other (14,388) (20,011)
-------------------------------------------------------------------------------------------
Accounts receivable and inventories from
continuing operations $1,690,901 $1,679,254
===========================================================================================
</TABLE>
* Asset information is not maintained by individual segment.
10
<PAGE>
15. In January 2000, Mattel and Warner Bros. Worldwide Consumer Products signed
a licensing agreement making Mattel the worldwide master toy licensee for
the literary characters from the Harry Potter books published by J.K.
Rowling as well as for feature film and television properties developed by
Warner Bros. Pictures featuring the Harry Potter characters. Mattel's
worldwide toy licensing agreement involves the first two Harry Potter books
and theatrical films. This agreement contains minimum royalty guarantees
and has a term of four years, provided that the second theatrical film is
released prior to January 1, 2003. If the second theatrical film is
released subsequent to January 1, 2003, the agreement will be extended to a
date twelve months after the release of the second theatrical film.
Pursuant to the agreement, Mattel issued Warner Bros. Consumer Products a
stock warrant, valued at $5.8 million, to purchase 3.0 million shares of
Mattel's common stock at an exercise price of $10.875 per share. This
warrant became fully vested and exercisable upon signing of the licensing
agreement and expires on December 31, 2003.
16. During the second quarter of 1999, Mattel initiated a restructuring plan
for its continuing business and incurred certain other nonrecurring charges
totaling $293.1 million, approximately $227 million after-tax or $0.56 per
share. The restructuring plan was aimed at leveraging global resources in
the areas of manufacturing, marketing and distribution, eliminating
duplicative functions worldwide and achieving improved operating
efficiencies. The following are the major restructuring initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of three higher cost manufacturing facilities.
Severance and other compensation costs associated with the restructuring
relate to the termination of approximately 3,000 employees around the
world. Through June 30, 2000, approximately $56 million has been incurred
related to the termination of nearly 2,950 employees, of which
approximately 250 were terminated during 2000.
11
<PAGE>
Components of the accrued restructuring and other nonrecurring costs,
including adjustments, related to continuing operations are as follows:
<TABLE>
<CAPTION>
Balance Amounts Balance
(In millions) Dec. 31, 1999 Adjustments Incurred June 30, 2000
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and other compensation $ 54 $(5) $(32) $17
Distributor, license and other contract
terminations 10 (3) (6) 1
Lease termination costs 15 - (7) 8
-----------------------------------------------------------------------------------------------------------
Total restructuring costs and asset writedowns 79 (8) (45) 26
Merger-related transaction and other costs 4 - - 4
Other nonrecurring charges 19 6 (3) 22
-----------------------------------------------------------------------------------------------------------
Total restructuring, asset writedowns and
other charges $102 $(2) $(48) $52
===========================================================================================================
</TABLE>
The adjustments made in the 2000 second quarter largely reflect the reversal
of excess restructuring reserves as a result of lower than anticipated costs
to complete certain actions compared to previous estimates, partially offset
by an increase in the reserve related to the Power Wheels(R) vehicle recall.
The balance of severance and other compensation principally represents the
continued consolidation and streamlining of Mattel's European operations,
which are currently underway, and future cash payments for employees already
terminated. The remaining restructuring largely consists of future cash
payments on vacated leased spaces. The restructuring actions are substantially
complete; however, future cash outlays will extend beyond this date largely
due to severance payment options available to affected employees and future
lease payments on vacated spaces. Total cash outlays are funded from existing
cash balances and internally generated cash from continuing operations.
The other nonrecurring charges principally relate to the October 1998 recall
of Mattel's Power Wheels(R) vehicles and environmental remediation costs
related to a manufacturing facility on a leased property in Beaverton, Oregon.
12
<PAGE>
Mattel, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain written and oral statements made or incorporated by reference from time
to time by Mattel or its representatives in this Quarterly Report on Form 10-Q,
other filings or reports filed with the Securities and Exchange Commission,
press releases, conferences, or otherwise, are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Mattel is including this cautionary statement to make applicable and take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any such forward-looking statements. Forward-looking
statements include any statement that may predict, forecast, indicate, or imply
future results, performance, or achievements, and forward-looking statements can
be identified by the use of terminology such as "believe," "anticipate,"
"expect," "estimate," "may," "will," "should," "project," "continue," "plans,"
"aims," "intends," "likely," or other words or phrases of similar terminology.
Management cautions you that forward-looking statements involve risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. In addition to the risk factors listed in Mattel's
1999 Annual Report on Form 10-K and Mattel's Current Report on Form 8-K dated
July 6, 2000 and other important factors detailed herein and from time to time
in other reports filed by Mattel with the Securities and Exchange Commission,
including Forms 8-K, 10-Q and 10-K, the following important factors could cause
actual results to differ materially from those suggested by any forward-looking
statements.
Marketplace Risks
- Increased competitive pressure, both domestically and internationally, which
may negatively affect the sales of Mattel's products
- Changes in public and consumer preferences, which may negatively affect
Mattel's toy business
- Significant changes in the play patterns of children, whereby they are
increasingly attracted to more developmentally advanced products at younger
ages, which may affect brand loyalty and the perceived value of and demand
for Mattel's products
- Possible weaknesses in economic conditions, both domestically and
internationally, which may negatively affect the sales of Mattel's products
and the costs associated with manufacturing and distributing these products
- Significant changes in the buying patterns of major customers
- Shortages of raw materials or components, which may inhibit the timely
manufacturing of Mattel's products
Financial Considerations
- Foreign currency exchange rate fluctuations, which may affect Mattel's
reportable income
- Significant increases in interest rates, both domestically and
internationally, which may negatively affect Mattel's cost of financing both
its operations and investments
- Reductions in Mattel's credit ratings may negatively impact the
cost of satisfying its financing requirements
13
<PAGE>
Other Risks
- Mattel's inability to complete the timely sale of its Consumer Software
segment, which may expose Mattel to further material operating losses and
restructuring charges relating to that business
- Development of new technologies, including the Internet, which may create new
risks to Mattel's ability to protect its intellectual property rights or
affect the development, marketing and sales of Mattel's products
- Changes in laws or regulations, both domestically and internationally,
including those affecting the Internet, consumer products, environmental
activities, import and export laws or trade restrictions, which may lead to
increased costs or interruption in normal business operations of Mattel
- Current and future litigation, governmental proceedings or environmental
matters, which may lead to increased costs or interruption in the normal
business operations of Mattel
- Labor disputes, which may lead to increased costs or disruption of any of
Mattel's operations
The risks included herein are not exhaustive. Other sections of this Quarterly
Report on Form 10-Q may include additional factors which could materially and
adversely impact Mattel's business, financial condition and results of
operations. Moreover, Mattel operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for management to predict all such risk factors on Mattel's business, financial
condition or results of operations or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
SUMMARY
Mattel designs, manufactures, and markets a broad variety of family products on
a worldwide basis through both sales to retailers and direct to consumers.
Mattel's business is dependent in great part on its ability each year to
redesign, restyle and extend existing core products and product lines, to design
and develop innovative new products and product lines, and to successfully
market those products and product lines. Mattel plans to continue to focus on
its portfolio of traditional brands which have historically had worldwide
sustainable appeal.
Mattel's portfolio of brands can be grouped in the following worldwide
categories:
Girls - including Barbie(R) fashion dolls and accessories, collector dolls,
Fashion Magic(R), Cabbage Patch Kids(R) and Polly Pocket(R)
Boys-Entertainment - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric
Racing and Tyco(R) Radio Control (collectively "Wheels"), Disney,
Nickelodeon(R), and games and puzzles
Infant & Preschool - including Fisher-Price(R), Power Wheels(R), Sesame
Street(R), Disney preschool and plush, Winnie the Pooh(R), See `N
Say(R), Magna Doodle(R), View-Master(R) and Blue's Clues(R)
Direct Marketing - American Girl(R), Barbie(R), Wheels and Fisher-Price(R)
14
<PAGE>
Mattel's business is seasonal, and, therefore, results of continuing operations
are comparable only with corresponding periods.
RESULTS OF CONTINUING OPERATIONS - SECOND QUARTER
Consolidated Results
--------------------
Net income from continuing operations for the second quarter of 2000 was $6.0
million or $0.01 per share as compared to net loss of $211.0 million or $0.52
per share in the second quarter of 1999. Profitability in the second quarter of
1999 was negatively impacted by a $227.4 million or $0.56 per share after-tax
charge related to restructuring and other non-recurring charges.
The following is a percentage analysis of results of continuing operations:
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
June 30, June 30,
2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100% 100%
===================================================================================================
Gross profit 44.5% 44.8%
Advertising and promotion expenses 12.1 12.1
Other selling and administrative expenses 26.7 24.7
Amortization of intangibles 1.6 1.6
Restructuring and other charges (0.2) 36.6
Other (income) expense, net (1.1) 0.1
---------------------------------------------------------------------------------------------------
Operating income (loss) 5.4 (30.3)
Interest expense 4.4 3.4
---------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 1.0% (33.7)%
===================================================================================================
</TABLE>
Net sales from continuing operations in the second quarter of 2000 increased 2%
to $817.8 million, from $802.3 million in 1999. In local currency sales were up
4% compared to a year ago. Sales to customers within the US increased 7% and
accounted for 71% of consolidated sales in the second quarter of 2000 compared
to 68% in 1999. Sales to customers outside the US decreased 9% from the year
ago quarter. However, before the unfavorable exchange impact, international
sales decreased by 3% compared to 1999. Additionally, certain European markets
continue to be impacted by retailer adjustments to just-in-time inventory
practices coupled with delayed shipments from the newly expanded Northern
European distribution center. Mattel expects improvement in the international
markets as shipments more closely match the just-in-time inventory management by
its retailers.
Sales in the worldwide Girls category increased 1% due to a 5% worldwide
increase in Barbie(R) products, partially offset by decreases in sales of other
girls products, including large and small dolls. Barbie(R) sales were up 19% in
the US, but were down 15% internationally. Excluding the unfavorable exchange
impact, Barbie(R) sales were down
15
<PAGE>
9% in international markets. Sales of Boys-Entertainment increased 2% worldwide.
Worldwide Wheels sales increased 1% led by the strong performance of Hot
Wheels,(R) up 18% in the US and 21% internationally, partially offset by
declines in Matchbox(R) and Tyco(R)Radio Control. The decrease in sales for
Matchbox(R) was largely attributable to shipping fall items later this year
compared to last year in the US and weakness internationally in its core markets
due to just-in-time efforts by retailers. Sales of Entertainment products
increased 4% worldwide, up 17% internationally due to the strength of Max
Steel(TM) products. Sales in the Infant and Preschool category were flat
worldwide, or up 2% before the unfavorable exchange impact. Fisher-Price(R)
worldwide sales increased 21%, offset by declines in sales of Sesame Street(R),
Disney Preschool and Winnie the Pooh(R). Mattel intends to grow its worldwide
Infant and Preschool business through increased productivity and brand expansion
by utilizing enhanced marketing and technological innovation, strengthening its
retailer and consumer support and reducing its product costs. However, Mattel
expects the current worldwide shortage of computer chips to have an adverse
effect on sales of its products that incorporate such components, primarily its
Infant and Preschool products. Direct marketing sales, which includes Pleasant
Company, Barbie(R) Collector and Fisher-Price(R) catalogs increased 15% compared
to last year.
Gross profit, as a percentage of net sales, was 44.5% in the second quarter of
2000 compared 44.8% last year. The positive impact of the product mix was
offset by the unfavorable effect of exchange translations and higher shipping
costs. Advertising and promotion, as a percentage of net sales, was 12.1% in
both the second quarter of 1999 and 2000. Other selling, general and
administrative expenses were 26.7% of net sales in 2000 compared to 24.7% in
1999, largely due to compensation costs for the recruiting and retention of
senior executives. Other income, net increased by approximately $10 million due
to favorable foreign exchange and investment gains. However, the overall
foreign exchange negatively impacted Mattel in the quarter, after considering
the impact on cost of goods sold and the translation of foreign sales and
earnings. Interest expense was $35.9 million in 2000 compared with $27.6
million in the 1999 quarter largely due to higher short term borrowing
necessitated by the previous funding of Mattel's software business. In
addition, Mattel's overall interest rate is higher due to increased market rates
and debt refinancing that occurred in the first half. Mattel's second quarter
tax rate was 27.6%, consistent with full year expectations.
Business Segment Results
------------------------
Mattel's reportable segments are separately managed business units and include
toy marketing and toy manufacturing. The Toy Marketing segment is divided on a
geographic basis between domestic and international. The domestic Toy Marketing
segment is further divided into US Girls, US Boys-Entertainment, US Infant &
Preschool and Other. The US Girls segment includes products such as Barbie(R),
Polly Pocket(R) and Cabbage Patch Kids(R). The US Boys-Entertainment segment
includes products in the Wheels and Entertainment categories. The US Infant &
Preschool segment includes Fisher-Price(R), Disney preschool and plush, Power
Wheels(R), Sesame Street(R) and other preschool products. The Other segment
principally sells girls specialty products, including American Girl(R), which
are sold through the direct marketing distribution channel. The International
Toy Marketing segment sells products in all toy categories.
16
<PAGE>
The US Girls segment sales increased by 15% in 2000 compared to 1999 due to a
19% increase in sales of Barbie(R) products. Within the Barbie(R) product line,
Mattel has employed strategies including targeting product for specific age
groups, creating a new logo and package design, and supporting retailer demand
for product in terms of earlier shipments and product offerings. The US Boys-
Entertainment segment sales remained flat due to a 2% increase in sales of
Wheels products, partially offset by a 6% decrease in sales of Entertainment
products. The Wheels business experienced an 18% increase in sales of Hot
Wheels(R), partially offset by a 33% decrease in Matchbox(R). The decrease in
Matchbox(R) was due to shipping fall items later this year compared to last
year. The decrease in Entertainment product sales was largely due to lower sales
of Nickelodeon(R) product. The US Infant & Preschool segment sales increased 7%
largely due to increased sales of core Fisher-Price(R) and Power Wheels(R)
products, partially offset by declines in sales of Sesame Street(R), Disney
Preschool and Winnie the Pooh(R) products.
Sales in the Other segment remained relatively flat with last year, as a 15%
increase in Direct Marketing sales was offset by a decrease in sales of other
non-core product. The International Toy Marketing segment sales decreased by 9%
compared to last year, or 3% before the unfavorable foreign exchange impact. In
local currency, Barbie(R) sales were down 9% and Infant & Preschool sales
declined 12%, partially offset by a 27% increase in Entertainment sales and a 4%
increase in Wheels sales. Sales in the Toy Manufacturing segment grew 33%
largely due to increased orders by the Toy Marketing segments for all products.
Operating profit in the US Girls segment increased by 31%, largely due to
increased sales of higher margin Barbie(R) products. The US Boys-Entertainment
segment experienced an operating loss of $6.7 million in 2000 compared to profit
of $0.3 million in 1999, largely due to lower volume and unfavorable product
mix. Operating profit in the US Infant & Preschool segment increased 10% due to
increased sales of relatively higher margin core Fisher-Price(R) products.
Operating profit in the Other segment decreased by 18% largely due to increased
operating costs to support the expansion of the direct marketing business and
broader catalogue distribution. The International Toy Marketing segment
operating profit declined from profit of $5.6 million in 1999 to a loss of $0.4
million in 2000 largely due to unfavorable product mix and exchange. The Toy
Manufacturing segment profit increased 20% largely due to increased production.
RESULTS OF CONTINUING OPERATIONS - SIX MONTHS
Consolidated Results
--------------------
Net loss from continuing operations for the first half of 2000 was $38.6 million
or $0.09 per share as compared to a net loss of $223.6 million or $0.56 per
share in the first half of 1999. Profitability in the first half of 2000 was
negatively impacted by a $38.4 million or $0.09 per share after-tax charge
related to the departure of certain senior executives. Profitability in the
first half of 1999 was negatively impacted by a $227.4 million or $0.56 per
share after-tax charge related to restructuring and other non-recurring charges.
17
<PAGE>
The following is a percentage analysis of results of continuing operations:
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------------
June 30, June 30,
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100% 100%
==================================================================================================
Gross profit 44.9% 45.3%
Advertising and promotion expenses 12.6 12.6
Other selling and administrative expenses 31.2 26.8
Amortization of intangibles 1.7 1.7
Restructuring and other charges (0.1) 19.8
Other (income) expense, net (1.0) 0.2
--------------------------------------------------------------------------------------------------
Operating income (loss) 0.5 (15.8)
Interest expense 4.0 3.5
--------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes (3.5)% (19.3)%
==================================================================================================
</TABLE>
Net sales from continuing operations in the first half of 2000 increased 1% to
$1,511.1 million, from $1,490.6 million in 1999. In local currency sales were up
3% compared to a year ago. Sales to customers within the US increased 6% and
accounted for 72% of consolidated sales in the first half of 2000 compared to
68% in 1999. Sales to customers outside the US decreased 8% from a year ago.
However, before the unfavorable exchange impact, international sales decreased
by 2% compared to 1999. Additionally, certain European markets continue to be
impacted by retailer adjustments to just-in-time inventory practices coupled
with delayed shipments from the newly expanded Northern European distribution
center. Mattel expects improvement in the international markets as shipments
more closely match the just-in-time inventory management by its retailers.
Sales in the worldwide Girls category increased 1% due to a 6% worldwide
increase in Barbie(R) products, partially offset by decreases in sales of other
girls products, including large and small dolls. Barbie(R) sales were up 17% in
the US, but were down 11% internationally. Excluding the unfavorable exchange
impact, Barbie(R) sales were down 5% in international markets. Sales of Boys-
Entertainment increased 2% worldwide. Worldwide Wheels sales decreased 1% due to
declines in Matchbox(R) and Tyco(R)Radio Control, partially offset by an
increase in Hot Wheels(R) sales. This category was impacted by Mattel's decision
to reduce first quarter shipments of Wheels product in order to reduce the level
of retail inventory that was left in December as a result of competition from
Pokemon(TM). Additionally, second quarter sales for Matchbox(R) declined due to
shipping fall items later this year compared to last year in the US and weakness
internationally in its core markets due to just-in-time efforts by retailers.
Sales of Entertainment products increased 9% worldwide, driven by the strength
of Toy Story 2 and Max Steel(TM) products. Sales in the Infant and Preschool
category were up 1% worldwide, or up 3% before the unfavorable exchange impact.
Fisher-Price(R) worldwide sales increased 21%, offset by declines in sales of
Sesame Street(R), Disney Preschool and Winnie the Pooh(R). Direct marketing
sales increased 4% compared to last year.
Gross profit, as a percentage of net sales, was 44.9% in the first half of 2000
compared to 45.3% last year. The positive impact of the product mix was offset
by the unfavorable effect of exchange translations and higher shipping costs.
Advertising and promotion, as a percentage of net sales, was 12.6% in both 1999
and 2000. Other selling,
18
<PAGE>
general and administrative expenses, excluding the one-time severance expense,
were 27.8% of net sales in 2000 compared to 26.8% in 1999, largely due to
compensation costs for the recruiting and retention of senior executives. Other
income, net, increased by approximately $19 million due to favorable foreign
exchange and investment gains. However, the overall foreign exchange negatively
impacted Mattel in the first half, after considering the impact on cost of goods
sold and the translation of foreign sales and earnings. Interest expense was
$60.3 million in 2000 compared with $52.5 million in 1999 largely due to higher
short term borrowing necessitated by the previous funding of Mattel's software
business. In addition, Mattel's overall interest rate is higher due to increased
market rates and debt refinancing that occurred in the first half. Mattel's
first half tax rate was 27.6%, consistent with full year expectations.
Business Segment Results
------------------------
The US Girls segment sales increased by 13% in 2000 compared to 1999 due to a
17% increase in sales of Barbie(R) product. Within the Barbie(R) product line,
Mattel has employed strategies including targeting product for specific age
groups, creating a new logo and package design, and supporting retailer demand
for product in terms of earlier shipments and product offerings. The US Boys-
Entertainment segment sales remained flat due to a 7% increase in sales of
Entertainment products, partially offset by a 2% decrease in sales of Wheels
products. The Wheels business experienced a 5% increase in sales of Hot
Wheels(R), partially offset by a 23% decrease in Matchbox(R). The decrease in
the Wheels category was impacted by Mattel's decision to reduce first quarter
shipments of Wheels product in order to reduce the level of retail inventory
that was left in December as a result of competition from Pokemon(TM).
Additionally, second quarter sales for Matchbox(R) declined due to shipping fall
items later this year compared to last year. The increase in Entertainment
product sales was largely due to introduction of Max Steel(TM) and increased
sales of Toy Story 2 product, partially offset by lower sales of Nickelodeon(R)
product. The US Infant & Preschool segment sales increased 6% largely due to
increased sales of core Fisher-Price(R) and Power Wheels(R) products, partially
offset by declines in sales of Sesame Street(R), Disney Preschool and Winnie the
Pooh(R) products.
Sales in the Other segment decreased 7%, as a 4% increase in Direct Marketing
sales was offset by a decrease in sales of other non-core product. The
International Toy Marketing segment sales decreased by 8% compared to last year,
or 2% before the unfavorable foreign exchange impact. In local currency,
Barbie(R) sales were down 5% and Infant & Preschool sales declined 7%, partially
offset by a 19% increase in Entertainment sales and a 6% increase in Wheels
sales. Sales in the Toy Manufacturing segment grew 50% largely due to increased
orders by the Toy Marketing segments for all products.
Operating profit in the US Girls segment increased by 29%, largely due to
increased sales of higher margin Barbie(R) products. The US Boys-Entertainment
segment experienced an operating loss of $5.8 million in 2000 compared to profit
of $1.4 million in 1999, largely due to unfavorable product mix. Operating
profit in the US Infant & Preschool segment increased 26% due to greater sales
of relatively higher margin core Fisher-Price(R) products. Operating
19
<PAGE>
profit in the Other segment decreased by 40% largely due to increased operating
costs to support the expansion of the direct marketing business and broader
catalogue distribution. The International Toy Marketing segment realized an
operating loss of $19.6 million in 2000 compared to a loss of $5.7 million in
1999 largely due to unfavorable product mix and exchange. The Toy Manufacturing
segment profit increased 43% largely due to increased production.
DISCONTINUED OPERATIONS
On March 31, 2000, Mattel's board of directors resolved to sell its Consumer
Software segment, which is comprised primarily of the assets of Learning
Company. As a result of this decision, the Consumer Software segment is being
reported as a discontinued operation effective March 31, 2000, and the
consolidated financial statements have been reclassified to segregate the net
investment in and operating results of the Consumer Software segment. Mattel
expects to sell the Consumer Software segment by the end of 2000 and expects to
record a gain for accounting purposes upon disposal.
FINANCIAL POSITION
Mattel's cash position as of June 30, 2000 was $129.7 million, higher than the
$53.9 million reported in the second quarter of 1999 but lower than the $247.4
million as of year end 1999. The $117.7 million decline compared to year end
1999 was principally due to the repayment of $100.0 million 6-3/4% Senior Notes
that matured in May 2000 and the funding of the Consumer Software business,
partially offset by the issuance of commercial paper and other short-term
borrowings. Accounts receivable, net decreased slightly to $1,057.4 million
compared to the balance of $1,064.1 million in June 1999. Inventory balances
increased $18.3 million from the 1999 quarter end. Since year end 1999,
inventory increased $197.2 million as a result of routine inventory buildup to
support third and fourth quarter sales. Intangibles, net decreased $54.0
million compared to the year-ago quarter due to amortization. Other assets
increased $317.0 million from the second quarter of 1999 and $116.0 million
compared to year end 1999 primarily due to higher deferred income taxes.
Short-term borrowings increased $561.5 million compared to the 1999 second
quarter end and $850.6 million compared to 1999 year end reflecting increased
commercial paper issuances and other short-term borrowings to fund Mattel's
seasonal financing needs, to support the Consumer Software business and to repay
the $100.0 million 6-3/4% Senior Notes that matured in May 2000. Current
portion of long-term liabilities decreased $130.6 million since second quarter
1999 due to the repayment of the 6-3/4% Senior Notes and $30.0 million of
Medium-Term notes at maturity. Seasonal financing needs for the next twelve
months for both continuing and discontinued operations are expected to be
satisfied through internally generated cash, issuance of commercial paper, and
use of Mattel's various short-term bank lines of credit. Accrued liabilities
decreased $169.1 million since quarter end 1999 primarily due to activity
related to the 1999 Mattel restructuring nearing completion.
20
<PAGE>
A summary of Mattel's capitalization is as follows:
<TABLE>
<CAPTION>
(In millions, except percentage
information) June 30, 2000 June 30, 1999 Dec. 31, 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Medium-term notes $ 540.5 19% $ 540.5 18% $ 540.5 17%
Senior notes 300.0 11 300.0 10 400.0 13
Other long-term debt obligations 42.0 2 42.7 2 42.4 2
---------------------------------------------------------------------------------------------------------------------------------
Total long-term debt 882.5 32 883.2 30 982.9 32
Other long-term liabilities 182.7 7 158.3 5 163.0 5
Stockholders' equity 1,695.8 61 1,903.6 65 1,962.6 63
---------------------------------------------------------------------------------------------------------------------------------
$2,761.0 100% $2,945.1 100% $3,108.5 100%
=================================================================================================================================
</TABLE>
Total long-term debt remained relatively the same as second quarter 1999 and
year end 1999. Mattel expects to satisfy its future long-term capital needs
through the retention of corporate earnings and the issuance of long-term debt
instruments. Other long-term liabilities increased $24.4 million compared to
second quarter 1999 due to increases in employee benefit plan liabilities.
Stockholders' equity decreased $207.8 million since June 30, 1999, primarily as
a result of operating losses, common and preferred dividends declared, treasury
stock purchases, and the unfavorable effect of foreign currency translation,
partially offset by the reissuance of treasury stock for the exercise of
nonqualified stock options by Mattel's employees. Stockholder's equity declined
$266.8 million from year end 1999 as a result of the cumulative 2000 operating
loss, common dividends declared, and the unfavorable effect of foreign currency
translation.
RESTRUCTURING AND OTHER CHARGES FROM CONTINUING OPERATIONS
During the second quarter of 1999, Mattel initiated a restructuring plan for its
continuing business and incurred certain other nonrecurring charges totaling
$293.1 million, approximately $227 million after-tax or $0.56 per share. The
restructuring plan was aimed at leveraging global resources in the areas of
manufacturing, marketing and distribution, eliminating duplicative functions
worldwide and achieving improved operating efficiencies. The plan, which was
designed to reduce product costs and overhead spending, resulted in actual cost
savings of approximately $35 million in 1999. Mattel expects savings of
approximately $90 million in 2000.
The following are the major restructuring initiatives:
. Consolidation of the Infant and Preschool businesses;
. Consolidation of the domestic and international back-office functions;
. Consolidation of direct marketing operations;
. Realignment of the North American sales force;
. Termination of various international distributor contracts; and
. Closure of three higher cost manufacturing facilities.
21
<PAGE>
Severance and other compensation costs associated with the restructuring relate
to the termination of approximately 3,000 employees around the world. Through
June 30, 2000, approximately $56 million has been incurred related to the
termination of nearly 2,950 employees, of which approximately 250 were
terminated during 2000.
Components of the accrued restructuring and other nonrecurring costs, including
adjustments, related to the continuing operations are as follows:
<TABLE>
<CAPTION>
Balance Amounts Balance
(In millions) Dec. 31, 1999 Adjustments Incurred June 30, 2000
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and other compensation $ 54 $(5) $(32) $17
Distributor, license and other contract
terminations 10 (3) (6) 1
Lease termination costs 15 - (7) 8
-------------------------------------------------------------------------------------------------------------
Total restructuring costs and asset writedowns 79 (8) (45) 26
Merger-related transaction and other costs 4 - - 4
Other nonrecurring charges 19 6 (3) 22
-------------------------------------------------------------------------------------------------------------
Total restructuring, asset writedowns and
other charges $102 $(2) $(48) $52
=============================================================================================================
</TABLE>
The adjustments made in the 2000 second quarter largely reflect the reversal of
excess restructuring reserves as a result of lower than anticipated costs to
complete certain actions compared to previous estimates, partially offset by an
increase in the reserve related to the Power Wheels(R) vehicle recall.
The balance of severance and other compensation principally represents the
continued consolidation and streamlining of Mattel's European operations, which
are currently underway, and future cash payments for employees already
terminated. The remaining restructuring largely consists of future cash payments
on vacated leased spaces. The restructuring actions are complete; however,
future cash outlays will extend beyond this date largely due to severance
payment options available to affected employees and future lease payments on
vacated spaces. Total cash outlays are funded from existing cash balances and
internally generated cash from continuing operations.
The other nonrecurring charges principally relate to the October 1998 recall of
Mattel's Power Wheels(R) vehicles and environmental remediation costs related to
a manufacturing facility on a leased property in Beaverton, Oregon.
22
<PAGE>
FOREIGN CURRENCY RISK
Mattel's results of operations and cash flows can be impacted by exchange rate
fluctuations. To limit the exposure associated with exchange rate movements,
Mattel enters into foreign currency forward exchange and option contracts
primarily to hedge its purchase of inventory, sales and other intercompany
transactions denominated in foreign currencies. Mattel's results of operations
can also be affected by the translation of foreign revenues and earnings into US
dollars.
Market risk exposures exist with respect to the settlement of foreign currency
transactions during the year because currency fluctuations cannot be predicted
with certainty. Mattel seeks to mitigate its exposure to market risk by
monitoring its currency exchange exposure for the year and partially or fully
hedging such exposure. In addition, Mattel manages its exposure through the
selection of currencies used for foreign borrowings and intercompany invoicing.
Mattel does not trade in financial instruments for speculative purposes.
23
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Greenwald Litigation and Related Matters
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025 008)
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 account
properly for sales and certain costs associated with sales and more specific
allegations that Mattel failed to account properly for certain royalty
obligations to The Walt Disney Company.
On December 5, 1996, Mattel's motion for summary adjudication of Ms. Greenwald's
public policy claim was granted. On December 9, 1997, Mattel's motion for
summary judgment of Ms. Greenwald's remaining claims was granted. On February 4,
1998, Ms. Greenwald appealed from the dismissal of her suit.
On March 27, 2000, the California Court of Appeal filed an opinion which
affirmed in part and reversed in part the judgment in favor of Mattel. The Court
of Appeal ruled that disputed factual issues exist which preclude summary
adjudication of certain claims and that such factual issues must be resolved by
a jury at trial. As a consequence, Ms. Greenwald's claims for termination in
violation of public policy, termination in breach of an implied agreement, and
violation of Labor Code Section 970 were ordered remanded to the trial court for
further proceedings. The Court of Appeal did not rule on whether Ms. Greenwald's
claims have substantive merit; it merely held that the claims should be
presented to a jury.
Mattel filed a petition requesting the California Supreme Court to review the
decision of the Court of Appeal. The petition was denied on June 14, 2000.
Jurisdiction will be restored to the trial court for further proceedings. Mattel
intends to continue to defend the action vigorously.
Litigation Related to Learning Company Earnings Shortfall
Following Mattel's announcement on October 4, 1999 that it expected an earnings
shortfall at its Learning Company division in the third quarter of 1999, several
of Mattel's stockholders filed purported class action complaints naming Mattel
and certain of its present and former officers and directors as defendants. The
complaints generally allege, among other things, that the defendants made false
or misleading statements that artificially inflated the price of Mattel's common
stock by overstating the revenues and net income of Mattel, and its Learning
Company division,
24
<PAGE>
and by falsely representing that the May 1999 Learning Company acquisition would
be immediately accretive to Mattel's 1999 and 2000 financial results.
On March 3, 2000, the Judicial Panel on Multidistrict Litigation granted
Mattel's motion, pursuant to 28 U.S.C. (S) 1407, for coordinated or consolidated
pretrial proceedings in the United States District Court for the Central
District of California of all pending (S) 10(b) and (S) 14(a) federal securities
litigation cases.
On July 6, 2000, plaintiffs filed a Consolidated Amended Complaint in the (S)
10(b) actions. On that same day, plaintiffs also filed a Consolidated Amended
Complaint in the (S) 14(a) actions.
Two additional purported class action complaints have been brought against
Mattel as successor to Learning Company and the former directors of Learning
Company on behalf of former stockholders of Broderbund Software, Inc.
("Broderbund") who acquired shares of Learning Company in exchange for their
Broderbund common stock in connection with the Learning Company-Broderbund
merger on August 31, 1998. The complaints in those actions generally allege that
Learning Company misstated its financial results prior to the time it was
acquired by Mattel. The purported class actions brought on behalf of Mattel and
Broderbund stockholders are currently pending in the United States District
Court for the Central District of California.
On July 14, 2000, plaintiffs filed a Consolidated Amended Complaint in the
Broderbund cases.
On October 25, 1999, a Mattel stockholder filed a derivative complaint on behalf
and for the benefit of Mattel in the Superior Court of the State of California,
County of Los Angeles. The complaint alleges that Mattel's directors breached
their fiduciary duties, wasted corporate assets and grossly mismanaged Mattel in
connection with Mattel's acquisition of Learning Company and seeks both monetary
and injunctive relief. On February 10, 2000, the Court dismissed the complaint
with leave to amend. On March 10, 2000, Mattel and the other defendants entered
into a stipulation with the plaintiff staying the action.
On March 17, 2000, a Mattel stockholder filed a second derivative complaint on
behalf and for the benefit of Mattel in the Superior Court of the State of
California, County of Los Angeles. On March 27, 2000, a Mattel stockholder filed
a third derivative complaint on behalf and for the benefit of Mattel in the
Court of Chancery of the State of Delaware in and for New Castle County. Both
complaints generally allege that Mattel's directors breached their fiduciary
duties and grossly mismanaged Mattel in connection with Mattel's acquisition of
Learning Company. The complaints seek both monetary and injunctive relief. On
May 5, 2000, the parties entered into a stipulation staying the Delaware
derivative action.
On May 15, 2000, a Mattel stockholder filed a fourth derivative complaint on
behalf of and for the benefit of Mattel in the Superior Court of the State of
California, County of Los Angeles. The complaint generally alleges that Mattel's
25
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directors breached their fiduciary duties and wasted Mattel's assets by
approving severance packages for Mattel's former chief executive officer and
president. The complaint seeks monetary relief.
On July 12, 2000, the plaintiffs in the first derivative action filed a notice
of related case with respect to the two other derivative actions pending in the
Superior Court of California, County of Los Angeles.
Mattel believes the purported class actions and derivative suits are without
merit and intends to defend them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Mattel was held on June 7, 2000 for the
purpose of electing directors and approving the appointment of independent
accountants. Proxies for the meeting were solicited pursuant to Regulation 14A
of the Securities Exchange Act of 1934 and there was no solicitation in
opposition to that of management. All of management's nominees for directors as
listed in the proxy statement were elected with the number of votes cast for
each nominee as follows:
Shares Voted Votes
"FOR" Withheld
---------------------------------------------------------------------
Eugene P. Beard 333,263,715 13,564,936
Harold Brown 305,426,487 13,566,736
Robert A. Eckert 159,136,831 6,972,829
Tully M. Friedman 305,801,874 13,566,736
Ronald M. Loeb 300,358,803 13,567,236
Andrea L. Rich 306,286,542 13,565,236
William D. Rollnick 300,377,834 13,567,236
Christopher A. Sinclair 301,263,332 13,567,236
John L. Vogelstein 300,577,009 13,567,236
Ralph V. Whitworth 389,140,024 13,566,436
The proposal to appoint PricewaterhouseCoopers LLP as independent accountants
for Mattel for the year ending December 31, 2000 was ratified by the following
vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
----------------------------------------------------------------------------
331,756,136 5,856,105 1,739,916 -
A stockholder proposal regarding certain reports related to the condition of
Mattel's manufacturing facilities by the board of directors was included in the
proxy statement dated April 28, 2000. The proposal was rejected by the following
vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
----------------------------------------------------------------------------
35,993,510 183,716,176 14,468,177 105,174,294
26
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A stockholder proposal regarding a shareholder vote on Mattel's shareholder
rights plan was included in the proxy statement dated April 28, 2000. The
proposal was approved by the following vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
--------------------------------------------------------------------------------
155,649,328 75,334,592 3,193,939 105,174,298
A stockholder proposal regarding the composition of the board of directors was
included in the proxy statement dated April 28, 2000. The proposal was rejected
by the following vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
--------------------------------------------------------------------------------
55,013,394 175,760,178 3,404,287 105,174,298
A stockholder proposal regarding management compensation was included in the
proxy statement dated April 28, 2000. The proposal was rejected by the following
vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" "NON-VOTE"
--------------------------------------------------------------------------------
28,309,157 202,432,074 3,436,632 105,174,294
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
11.0 Computation of Income (Loss) per Common and Common
Equivalent Share
12.0 Computation of Ratio of Earnings to Fixed Charges and
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
27.0 Financial Data Schedule (EDGAR filing only)
99.0 Loan Agreement dated April 7, 2000 between Mattel and
Adrienne Fontanella
99.1 Loan Agreement dated April 7, 2000 between Mattel and
Matthew C. Bousquette
99.2 Loan Agreement dated April 7, 2000 between Mattel and
Neil B. Friedman
99.3 Loan Agreement dated May 18, 2000 between Mattel and
Robert A. Eckert
99.4 Summary of Principal Terms of Employment Agreement
between Robert A. Eckert and Mattel dated May 15, 2000
(b) Reports on Form 8-K
-------------------
Mattel, Inc. filed the following Current Reports on Form 8-K
during the quarterly period ended June 30, 2000:
Financial Statements
Date of Report Items Reported Filed
--------------------------------------------------------------
April 6, 2000 5, 7 None
May 18, 2000 5, 7 None
27
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATTEL, INC.
-------------------------------------
(Registrant)
Date: As of July 25, 2000 By: /s/ William S. Guarisco
------------------- -------------------------------------
William S. Guarisco
Senior Vice President and Corporate
Controller
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