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UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-05647
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MATTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-1567322
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
333 Continental Boulevard
El Segundo, California 90245-5012
(Address of principal executive offices)
(310) 252-2000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value New York Stock Exchange
Pacific Exchange, Inc.
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 22, 2002 was $9,109,214,827.
Number of shares outstanding of registrant's common stock, $1.00 par value,
(including 1,070,962 common shares issuable upon exchange of outstanding
exchangeable shares of Softkey Software Products Inc.) as of March 22, 2002:
433,772,135 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Mattel, Inc. 2002 Notice of Annual Meeting of Stockholders
and Proxy Statement, to be filed with the Securities and Exchange Commission
within 120 days after the close of the registrant's fiscal year (Incorporated
into Part III).
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PART I
Item 1. Business
Mattel, Inc. ("Mattel") designs, manufactures, and markets a broad variety
of toy products on a worldwide basis through sales both to retailers and direct
to consumers.
Mattel believes its products are among the most widely recognized toy
products in the world. Mattel's portfolio of brands and products are grouped in
the following categories:
Girls--including Barbie(R) fashion dolls and accessories, collector dolls,
Polly Pocket!(R), Diva Starz(TM), What's Her Face!(TM) and American Girl(R)
Boys-Entertainment--including Hot Wheels(R), Matchbox(R), Hot Wheels(R)
Electric Racing and Tyco(R) Radio Control vehicles and playsets
(collectively "Wheels"), and Disney, Nickelodeon(R), Harry Potter(TM),
Max Steel(TM) and games and puzzles (collectively "Entertainment")
Infant & Preschool--including Fisher-Price(R), Power Wheels(R), Sesame
Street(R), Disney preschool and plush, Winnie the Pooh(R), Blue's Clues(R),
See "N Say(R), Magna Doodle(R) and View-Master(R)
In 2000, Mattel's management articulated its overall company vision: to
create and market "the world's premier toy brands for today and tomorrow."
Management set five key company strategies: (i) improve execution of the
existing toy business; (ii) globalize the brands; (iii) extend the brands; (iv)
catch new trends; and (v) develop employees. In 2001, Mattel focused on
executing these strategies. Among other key initiatives, Mattel sought to
improve customer service levels by enhancing supply chain performance. Mattel
also initiated significant employee development measures, including performance
tracking, leadership classes, global employee surveys and follow-up action
plans. In addition, in 2001, Mattel added two new independent directors to its
Board of Directors.
In 2001, Mattel continued to excecute its financial realignment plan,
originally announced during the third quarter of 2000, designed to improve
gross margin; selling and administrative expenses; operating profit; and cash
flow. The plan will require a total pre-tax charge estimated at approximately
$250 million, or $170 million on an after-tax basis. Through December 31, 2001,
Mattel had recorded pre-tax charges totaling $175.4 million or approximately
$119 million on an after-tax basis. Under the plan, Mattel expects to generate
approximately $200 million of cumulative pre-tax cost savings over the three
year duration of the plan. Mattel recognized savings of approximately $55
million in 2001 and expects to achieve savings of approximately $65 million in
2002. See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations--2000 Financial Realignment Plan" and Item 8
"Financial Statements and Supplementary Data--Note 9 to the Consolidated
Financial Statements."
In 2000, Mattel implemented a two phase interactive media strategy,
consisting of the disposition of the Learning Company division that had been
acquired in 1999 and the licensing of Mattel's core brands to leading
interactive companies. The disposition of the Learning Company division was
completed in October 2000. Licensing agreements with Vivendi Universal
Publishing for Barbie(R) and Fisher-Price(R) brands, and THQ, Inc. for Hot
Wheels(R) and Matchbox(R) brands, were announced in January 2001.
Mattel was incorporated in California in 1948 and reincorporated in Delaware
in 1968. Its executive offices are located at 333 Continental Boulevard, El
Segundo, California 90245-5012, telephone (310) 252-2000.
Business Segments
"Mattel" refers to Mattel, Inc. and its subsidiaries as a whole, unless the
context requires otherwise. Mattel's reportable segments are separately managed
business units and are divided on a geographic basis between domestic and
international. The domestic segment is further divided into US Girls, US Boys-
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Entertainment, and US Infant & Preschool. For additional information with
respect to Mattel's business segment reporting, including revenue, profit and
loss and assets, see Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Continuing Operations--Business
Segment Results" and Item 8 "Financial Statements and Supplementary Data--Note
10 to the Consolidated Financial Statements." For additional information
regarding geographic areas, see Item 8 "Financial Statements and Supplementary
Data--Note 10 to the Consolidated Financial Statements."
Domestic Segment
The Domestic segment develops toys that it markets and sells in the US
Girls, US Boys-Entertainment and US Infant & Preschool segments.
US Girls segment includes brands such as Barbie(R) fashion dolls and
accessories, collector dolls, Polly Pocket!(R), Diva Starz(TM), What's Her
Face!(TM) and American Girl(R). In 2002, Mattel expects to introduce Barbie(R)
as Rapunzel(TM), a hair-play fashion doll and computer graphic imagery video,
Fashion Polly(TM) Sparkle Style(TM) House and Malibu Barbie(R), a reissue of
one of the most popular Barbie(R) dolls ever.
US Boys-Entertainment segment includes Hot Wheels(R), Matchbox(R), Hot
Wheels(R) Electric Racing and Tyco(R) Radio Control (collectively "Wheels") and
Disney, Nickelodeon(R), Harry Potter(TM), Max Steel(TM) and games and puzzles
(collectively "Entertainment") products. New Boys-Entertainment products in
2002 are expected to include Hot Wheels(R) Turbo Jet City(TM) Playset,
Matchbox(R) Radio Rescue Playset, Harry Potter(TM) Polyjuice Potion Maker,
Tyco(R) RC Extreme Stunt Scooter and a toy line based on Yu-Gi-Oh!(TM), the
Japanese cartoon and card game property.
US Infant & Preschool segment includes Fisher-Price(R), Power Wheels(R),
Sesame Street(R), Disney preschool and plush, Winnie the Pooh(R), Blue's
Clues(R), See N Say(R), Magna Doodle(R), and View-Master(R) brands. New product
introductions for 2002 are expected to include Guess What Elmo, Magic
Rattle(TM) Pooh, Blue's Clues(R) Music Studio, Rescue Heroes(TM) new Power
Force figures, Pixter(TM) PRO digital creative system, Lightning PAC(TM)
battery-powered kid scooter and a preschool Grow With Me(TM) Remote Control
Raceway.
International Segment
Generally, products marketed by the International segment are the same as
those developed and marketed by the Domestic segment, although some are
developed or adapted for particular international markets. Mattel's products
are sold directly in Canada and most European, Asian and Latin American
countries, and through agents and distributors in those countries where Mattel
has no direct presence. See "Licenses and Distribution Agreements."
Revenues from Mattel's International segment represented approximately 31%
of total consolidated net sales in 2001.
The strength of the US dollar relative to other currencies can significantly
affect the revenues and profitability of Mattel's international operations.
Mattel enters into foreign currency forward exchange and option contracts
primarily to hedge its purchase and sale of inventory, and enters into other
intercompany transactions denominated in foreign currencies to limit the effect
of exchange rate fluctuations on its results of operations and cash flows. See
Item 7a "Quantitative and Qualitative Disclosures About Market Risk" and Item 8
"Financial Statements and Supplementary Data--Note 8 to the Consolidated
Financial Statements." For financial information by geographic area, see Item 8
"Financial Statements and Supplementary Data--Note 10 to the Consolidated
Financial Statements."
Manufacturing
Mattel manufactures toy products both in company-owned facilities and
through independent contractors. Products are also purchased from unrelated
entities that design, develop and manufacture the products. In order to provide
greater flexibility in the manufacture and delivery of products, and as part of
a continuing effort to reduce manufacturing costs, Mattel has concentrated
production of most of its core products in Mattel's facilities and generally
uses independent contractors for the production of non-core products.
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Mattel's principal manufacturing facilities are located in China, Indonesia,
Italy, Malaysia, Mexico and Thailand. Mattel also utilizes independent
contractors to manufacture products in the US, Europe, Mexico, the Far East and
Australia. To help avoid disruption of its product supply due to political
instability, civil unrest, economic instability, changes in government policies
and other risks, Mattel produces many of its key products in more than one
facility. During 1999, Mattel closed three of its higher-cost manufacturing
facilities and in 2001 announced plans to close a distribution and
manufacturing facility in Murray, Kentucky. See Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations--2000 Financial
Realignment Plan and 1999 Restructuring and Other Charges" and Item 8
"Financial Statements and Supplementary Data--Note 9 to the Consolidated
Financial Statements." Mattel believes that its existing production capacity at
its own and its independent contractors' manufacturing facilities is sufficient
to handle expected volume in the foreseeable future. See Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Factors That May Affect Future Results."
Mattel bases its production schedules for toy products on customer orders,
taking into account historical trends, results of market research and current
market information. Actual shipments of products ordered and order cancellation
rates are affected by consumer acceptance of product lines, strength of
competing products, marketing strategies of retailers and overall economic
conditions. Unexpected changes in these factors could result in a lack of
product availability or excess inventory in a particular product line.
The foreign countries in which most of Mattel's products are manufactured
(principally China, Indonesia, Thailand, Malaysia and Mexico) all enjoy
permanent "normal trade relations" ("NTR") status under US tariff laws, which
provides a favorable category of US import duties. China's NTR status became
permanent on January 1, 2002, following enactment of a bill authorizing such
status upon the country's accession to the World Trade Organization, which
occurred in December 2001. This substantially reduces the possibility of China
losing its NTR status, which would result in increased costs for Mattel and
others in the toy industry.
With the implementation of the Uruguay Round agreement effective January 1,
1995, all US duties on dolls and traditional toys were completely eliminated.
Canada also eliminated its tariffs on dolls and most toy categories in 1995,
with the exception of certain toy sets and board games that will have their
duties eliminated over ten years. Meanwhile, both the European Union and Japan
are in the process of implementing Uruguay Round tariff concessions that
reduced their tariffs on dolls by 40% and 15%, respectively, as of January 1,
1999, and will lead to the phased elimination of their duties on several other
toy categories by January 1, 2004.
Virtually all of Mattel's raw materials are available from numerous
suppliers but may be subject to fluctuations in price. Mattel has long-term
agreements in place with major suppliers that allow the suppliers to pass on
only their actual raw material cost increases.
Competition and Industry Background
Competition in the toy industry is intense and is based primarily on price,
quality and play value.
Mattel's US Girls and US Boys-Entertainment segments compete with several
large toy companies, including Hasbro, Inc., and many smaller toy companies.
The US Infant & Preschool market, which includes Fisher-Price, Inc. as one of
the leading companies, is more fragmented. In the infant category, competitors
include Kids II, V-Tech, Hasbro and The First Years. In the preschool category,
competitors include Leap Frog, Hasbro and Learning Curve. In the plush
category, competitors include Dan-Dee, Commonwealth and Hasbro. Mattel's
International segment competes with global toy companies including Hasbro,
Lego, Tomy and Bandai, as well as national and regional toy companies. Foreign
national and regional toy markets may include competitors who are strong in a
particular toy line or geographical area, but do not compete with Mattel and
other international toy companies on a worldwide basis.
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Seasonality
Mattel's business is highly seasonal, with consumers making a large
percentage of all toy purchases around the traditional holiday season in the
fourth quarter. A significant portion of Mattel's customers' purchasing occurs
in the third and fourth quarters in anticipation of such holiday buying. As a
result of the seasonal purchasing patterns and production lead times, Mattel's
business is subject to risks associated with the underproduction of popular
toys and the overproduction of toys that do not match consumer demand.
Retailers are also attempting to manage their inventories more tightly,
requiring Mattel to ship products closer to the time the retailers expect to
sell the products to consumers. These factors increase the risk that Mattel may
not be able to meet demand for certain products at peak demand times, or that
Mattel's own inventory levels may be adversely impacted by the need to pre-
build products before orders are placed. Additionally, as retailers manage
their inventories, Mattel experiences cyclical ordering patterns for products
and product lines that may cause its sales to vary significantly from period to
period.
In anticipation of retail sales in the traditional holiday season, Mattel
significantly increases its production in advance of the peak selling period,
resulting in a corresponding build-up of inventory levels in the first three
quarters of the year. Seasonal shipping patterns result in significant peaks in
the third and fourth quarters in the respective levels of inventories and
accounts receivable, which result in seasonal working capital financing
requirements. See "Seasonal Financing."
Product Design and Development
Through its product design and development group, Mattel regularly
refreshes, redesigns and extends existing toy product lines and develops
innovative new toy product lines. Mattel's success is dependent on its ability
to continue this activity. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results." Product design and development are principally conducted by a group
of professional designers and engineers employed by Mattel.
Independent toy designers and developers bring concepts and products to
Mattel and are generally paid a royalty on the net selling price of products
licensed to Mattel. These independent toy designers may also create different
products for other toy companies.
With respect to new product introductions, Mattel's strategy is to begin
production on a limited basis until a product's initial success has been proven
in the marketplace. The production schedule is then modified to meet
anticipated demand. Mattel further limits its risk by generally having
independent contractors manufacture new product lines in order to minimize
capital expenditures associated with new product introductions. This strategy
has reduced inventory risk and limited the potential loss associated with new
product introductions.
Mattel devotes substantial resources to product design and development.
During the years ended December 31, 2001, 2000 and 1999, Mattel spent
approximately $176 million, $180 million and $172 million, respectively, in
connection with the design and development of products, exclusive of royalty
payments. See Item 8 "Financial Statements and Supplementary Data--Note 12 to
the Consolidated Financial Statements."
Advertising, Marketing and Sales
Mattel supports its product lines with extensive advertising and consumer
promotions. Advertising continues at varying levels throughout the year and
peaks during the Christmas season. Advertising includes television and radio
commercials, and magazine and newspaper advertisements. Promotions include in-
store displays, coupons, sweepstakes, merchandising materials and major events
focusing on products and tie-ins with various consumer products companies.
Mattel has a retail store, American Girl(TM) Place, in Chicago featuring
children's products from Mattel's Pleasant Company division.
During the years ended December 31, 2001, 2000 and 1999, Mattel spent
approximately $662 million (13.8% of net sales), $686 million (14.7% of net
sales) and $685 million (14.9% of net sales), respectively, on worldwide
advertising and promotion.
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Mattel's products are sold throughout the world. Products within the
Domestic segment are distributed directly to large retailers, including
discount and free-standing toy stores, chain stores, department stores, other
retail outlets and, to a limited extent, wholesalers. Mass merchandisers, such
as Wal-Mart and Target, continue to increase their market share. Products
within the International segment are sold directly in Canada and most European,
Asian and Latin American countries, and through agents and distributors in
those countries where Mattel has no direct presence.
During the year ended December 31, 2001, Mattel's three largest customers,
Wal-Mart, Toys "R" Us and Target, accounted for approximately 50% of
consolidated net sales. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors That May Affect Future
Results" and Item 8 "Financial Statements and Supplementary Data--Note 8 to the
Consolidated Financial Statements."
In the International segment, there is also significant concentration of
sales to certain large customers. The customers and the degree of concentration
vary depending upon the region or nation.
Licenses and Distribution Agreements
Mattel has license agreements with third parties that permit Mattel to
utilize the trademark, character, or inventions of the licensor in product
lines that Mattel manufactures. A number of these licenses relate to product
lines that are significant to Mattel's business and operations. An important
licensor is Warner Bros., which licenses the Harry Potter(TM) book and movie
property for use on Mattel's products. Mattel also has entered into license
agreements with, among others: Disney Enterprises, Inc., relating to classic
Disney characters such as Mickey Mouse(R), Winnie the Pooh(R) and the Disney
Princesses; Sesame Workshop relating to its Sesame Street(R) properties; Viacom
International, Inc. relating to its Nickelodeon(R) properties; and Lyons
Partnership, L.P. relating to Barney(TM), the purple dinosaur, as well as
Barney(TM) for Baby, for infant and preschool toys, feature plush, electronic
learning aids, games and puzzles. In November 2001, Mattel entered into a
license agreement with Nihon Ad Systems Inc. for the master toy license to the
Yu-Gi-Oh!(TM) property worldwide, excluding Asia, for a term of four years,
which includes the categories of action figures, vehicles, activity toys, games
and puzzles.
Royalty expense during the years ended December 31, 2001, 2000 and 1999 was
approximately $220 million, $259 million and $220 million, respectively. See
"Product Design and Development" and Item 8 "Financial Statements and
Supplementary Data--Note 7 to the Consolidated Financial Statements."
Mattel also licenses a number of its trademarks, characters and other
property rights to others for use in connection with the sale of non-toy
products that do not compete with Mattel's products, in particular for consumer
software products. Mattel distributes some third party finished products that
are independently designed and manufactured.
Trademarks, Copyrights, and Patents
Most of Mattel's products are sold under trademarks, trade names and
copyrights and a number of those products incorporate patented devices or
designs. Trade names and trademarks are significant assets of Mattel in that
they provide product recognition and acceptance worldwide.
Mattel customarily seeks patent, trademark or copyright protection covering
its products, and it owns or has applications pending for US and foreign
patents covering many of its products. A number of these trademarks and
copyrights relate to product lines that are significant to Mattel's business
and operations. Mattel believes its rights to these properties are adequately
protected, but there can be no assurance that its rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.
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Commitments
In the normal course of business, Mattel enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect Mattel's right to create and
market certain products. Certain of these commitments routinely contain
provisions for guaranteed or minimum expenditures during the term of the
contracts. Current and future commitments for guaranteed payments reflect
Mattel's focus on expanding its product lines through alliances with businesses
in other industries.
As of December 31, 2001, Mattel had outstanding commitments for 2002
purchases of inventory of approximately $121 million. Licensing and similar
agreements with terms extending through the year 2010 contain provisions for
future guaranteed minimum payments aggregating approximately $379 million. See
Item 8 "Financial Statements and Supplementary Data--Note 7 to the Consolidated
Financial Statements."
Mattel ships products in accordance with delivery schedules specified by its
customers, which usually request delivery within three to six months. In the
toy industry, orders are subject to cancellation or change at any time prior to
shipment. In recent years, a trend toward just-in-time inventory practices in
the toy industry has resulted in fewer advance orders and therefore less
backlog of orders. Mattel believes backlog orders at any given time may not
accurately indicate future sales.
Financial Instruments
Mattel's results of operations and cash flow may be impacted by exchange
rate fluctuations. 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 using foreign currency forward exchange and option
contracts primarily to hedge its purchase and sale of inventory, and other
intercompany transactions denominated in foreign currencies. These contracts
generally have maturity dates of up to 18 months. In addition, Mattel manages
its exposure through the selection of currencies used for international
borrowings and intercompany invoicing. Mattel's results of operations can also
be affected by the translation of foreign revenues and earnings into US
dollars. Mattel does not trade in financial instruments for speculative
purposes.
For additional information regarding foreign currency contracts, see
"International Segment" above, Item 7a "Quantitative and Qualitative
Disclosures About Market Risk" and Item 8 "Financial Statements and
Supplementary Data--Note 8 to the Consolidated Financial Statements."
Seasonal Financing
Mattel's financing of seasonal working capital, as well as that of the
industry taken as a whole, typically grows throughout the first half of the
year and peaks in the third or fourth quarter, when accounts receivable are at
their highest due to increased sales volume, and when inventories are at their
highest in anticipation of expected second half sales volume. See
"Seasonality." Mattel 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 under one of
its committed domestic revolving credit facilities, and using various short-
term bank lines of credit. In addition, Mattel avails itself of individual
short-term foreign credit lines with a number of banks and enters into
agreements with banks of its foreign subsidiaries for non-recourse sales of
certain of its foreign subsidiary receivables, which arrangements will be used
as needed to finance seasonal working capital requirements of certain foreign
subsidiaries.
Mattel's domestic unsecured committed revolving credit facility provides
$1.0 billion in short-term borrowings from a commercial bank group. This
facility was originally executed in 1998 for a term of five years, expiring in
2003. In March 2002, Mattel amended and restated this facility into a $1.060
billion, 3-year facility that expires in 2005 with substantially similar terms
and conditions. In first quarter 2001, Mattel renewed its 364-day, $400.0
million unsecured committed credit facility, with essentially the same terms
and
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conditions as the $1.0 billion revolving credit facility. Mattel has elected
not to renew this facility when it expires in March 2002, as it believes that
cash on hand at the beginning of 2002 and its $1.060 billion domestic unsecured
committed revolving credit facility will be sufficient to meet its seasonal
working capital requirements in 2002.
The unsecured credit facilities and another $200.0 million term loan
currently in place require Mattel to meet financial covenants for consolidated
debt-to-capital and interest coverage. Currently, Mattel is in compliance with
such covenants. See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources-Seasonal
Financing" and Item 8 "Financial Statements and Supplementary Data--Note 4 to
the Consolidated Financial Statements."
To meet seasonal borrowing requirements of certain foreign subsidiaries,
Mattel negotiates individual financing arrangements. Foreign credit lines total
approximately $368 million. Mattel expects to extend these credit lines through
2002. In the fourth quarter of 2001, Mattel entered into a securitization
agreement with a European bank to sell certain receivables of its French and
German subsidiaries. Mattel also enters into agreements with banks of its
foreign subsidiaries for non-recourse sales of certain of its foreign
subsidiary receivables.
Mattel believes the amounts available from financing sources outlined above
will be adequate to meet its seasonal financing requirements for 2002.
Government Regulations
Mattel's toy products sold in the US are subject to the provisions of the
Consumer Product Safety Act and the Federal Hazardous Substances Act, and may
also be subject to the requirements of the Flammable Fabrics Act or the Food,
Drug and Cosmetics Act, and the regulations promulgated pursuant to such
statutes. The Consumer Product Safety Act and the Federal Hazardous Substances
Act enable the Consumer Product Safety Commission to exclude from the market
consumer products that fail to comply with applicable product safety
regulations or otherwise create a substantial risk of injury, as well as
articles that contain excessive amounts of a banned hazardous substance. The
Consumer Product Safety Commission may also require the recall and repurchase
or repair by the manufacturer of articles that are banned. Similar laws exist
in some states and cities and in various international markets.
Fisher-Price's car seats are subject to the provisions of the National
Highway Transportation Safety Act, which enables the National Highway Traffic
Safety Administration to promulgate performance standards for child restraint
systems. Fisher-Price conducts periodic tests to ensure that its child
restraint systems meet applicable standards. A Canadian agency, Transport
Canada, also regulates child restraint systems sold for use in Canada. As with
the Consumer Product Safety Commission, the National Highway Transportation
Safety Administration and Transport Canada can require the recall and
repurchase or repair of products that do not meet their respective standards.
In 2001, Fisher-Price announced plans to exit the car seat business.
Mattel maintains a quality control program to ensure compliance with various
US federal, state and applicable foreign product safety requirements.
Notwithstanding the foregoing, there can be no assurance that all of Mattel's
products are or will be free from defects or hazard-free. A product recall
could have a material adverse effect on Mattel's results of operations and
financial condition, depending on the product affected by the recall and the
extent of the recall efforts required. A product recall could also negatively
effect Mattel's reputation and the sales of other Mattel products.
Mattel's advertising is subject to the Federal Trade Commission Act, The
Children's Television Act of 1990, the rules and regulations promulgated by the
Federal Trade Commission and the Federal Communications Commission as well as
laws of certain countries that regulate advertising to children. In addition,
Mattel's websites that are directed to children are subject to the Children's
Online Privacy Protection Act. Mattel is subject to various other federal,
state and local laws and regulations applicable to its business. Mattel
believes that it is in substantial compliance with these laws and regulations.
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Employees
The total number of persons employed by Mattel and its subsidiaries at any
one time varies because of the seasonal nature of its manufacturing operations.
At December 31, 2001, Mattel's total number of employees, including its
international operations, was approximately 27,000.
Executive Officers of the Registrant
The current executive officers of Mattel, all of which are appointed
annually by the board of directors and serve at the pleasure of the board, are
as follows:
Executive
Officer
Name Age Position Since
---- --- -------- ---------
Robert A. Eckert........ 47 Chairman of the Board of Directors and Chief Executive Officer 2000
Matthew C. Bousquette... 43 President, Boys/Entertainment 1999
Thomas A. Debrowski..... 51 Executive Vice President, Worldwide Operations 2000
Joseph F. Eckroth, Jr... 43 Chief Information Officer 2000
Kevin M. Farr........... 44 Chief Financial Officer 1996
Adrienne Fontanella..... 43 President, Girls/Barbie 1999
Neil B. Friedman........ 54 President, Fisher-Price Brands 1999
Alan Kaye............... 48 Senior Vice President, Human Resources 1997
Douglas E. Kerner....... 44 Senior Vice President and Corporate Controller 2001
Robert Normile.......... 42 Senior Vice President, General Counsel and Secretary 1999
William Stavro.......... 62 Senior Vice President and Treasurer 1993
Bryan Stockton.......... 48 Executive Vice President, Business Planning and Development 2000
Mr. Eckert has been Chairman of the Board of Directors and Chief Executive
Officer since May 2000. He was formerly President and Chief Executive Officer
of Kraft Foods, Inc., the largest packaged food company in North America and a
subsidiary of Philip Morris Companies Inc., from October 1997 until May 2000.
From 1995 to 1997, Mr. Eckert was Group Vice President of Kraft Foods, Inc.
From 1993 to 1995, Mr. Eckert was President of the Oscar Mayer foods division
of Kraft Foods, Inc. Mr. Eckert worked for Kraft Foods, Inc. for 23 years prior
to joining Mattel.
Mr. Bousquette has been President, Boys/Entertainment since March 1999. From
May 1998 to March 1999, he was Executive Vice President and General Manager-
Boys Toys. From 1995 to 1998, he was General Manager--Boys Toys. He joined
Mattel in December 1993 as Senior Vice President-Marketing.
Mr. Debrowski has been Executive Vice President, Worldwide Operations, since
November 2000. From February 1992 until November 2000, he was Senior Vice
President-Operations and a director of The Pillsbury Company. From September
1991 until February 1992, he was Vice President of Operations for The Baked
Goods Division of The Pillsbury Company. Prior to that, he served as Vice
President and Director of Grocery Operations for Kraft U.S.A.
Mr. Eckroth has been Chief Information Officer since July 2000. From July
1998 until July 2000, he was Chief Information Officer of General Electric
Company's Medical Systems unit. From November 1995 until June 1998, he served
as Chief Information Officer of General Electric Company's Industrial Controls
Systems division. Prior to that, he held several senior positions within
Operations and Information Technology at the Northrop Grumman Corporation.
Mr. Farr has been Chief Financial Officer since February 2000. From
September 1996 to February 2000, he was Senior Vice President and Corporate
Controller. From June 1993 to September 1996, he served as Vice President, Tax.
Prior to that, he served as Senior Director, Taxes from August 1992 to June
1993.
9
Ms. Fontanella has been President, Girls/Barbie since March 1999. From
November 1998 to March 1999, she was General Manager and Senior Vice President-
Worldwide Barbie Licensing and Collectibles. From February to November 1998,
she was Senior Vice-President-Worldwide Barbie Licensing and New Ventures. She
joined Mattel in May 1996 as Vice President. Prior to joining Mattel, she held
senior positions within the cosmetics industry, including Chairman of January
Productions from 1995 to 1996.
Mr. Friedman has been President, Fisher-Price Brands since March 1999. From
August 1995 to March 1999, he was President-Tyco Preschool. For more than five
years prior to that time, he was President of MCA/Universal Merchandising,
Executive Vice President and Chief Operating Officer of Lionel Leisure, Inc.,
and President of Aviva/Hasbro.
Mr. Kaye has been Senior Vice President of Human Resources since July 1997.
From June 1996 to June 1997 he was President, Texas Division of Kaufman and
Broad Homes, a home building company. From June 1991 to June 1996, he served as
Senior Vice President, Human Resources for Kaufman and Broad Homes. Prior to
that he worked for two years with the Hay Group, a compensation consulting firm
and for 12 years with IBM in various Human Resources positions.
Mr. Kerner has been Senior Vice President and Corporate Controller since
April 2001, when he joined Mattel. Prior to joining Mattel, he served as
Executive Vice President, Finance, of Premier Practice Management, Inc. from
November 1998 to March 2001. From February to June 1998, he worked for FPA
Medical Management, Inc., most recently serving as Vice President, Treasurer
and Acting Chief Financial Officer. From 1991 to 1997 he worked for Total
Petroleum (North America) Ltd., most recently as Vice President & Treasurer.
Mr. Normile has been Senior Vice President, General Counsel and Secretary
since March 1999. He served as Vice President, Associate General Counsel and
Secretary from August 1994 to March 1999. From June 1992 to August 1994, he
served as Assistant General Counsel. Prior to that, he was associated with the
law firms of Latham & Watkins and Sullivan & Cromwell.
Mr. Stavro has been Senior Vice President and Treasurer since May 1995. From
November 1993 to May 1995, he was Vice President & Treasurer. From March 1992
to November 1993, he was Vice President & Assistant Treasurer. Prior to that,
he was Assistant Treasurer for more than five years.
Mr. Stockton has been Executive Vice President, Business Planning and
Development, since November 2000. From April 1998 until November 2000, he was
President and Chief Executive Officer of Basic Vegetable Products, the largest
manufacturer of vegetable ingredients in the world. For more than five years
prior to that, he was employed by Kraft Foods, Inc., the largest packaged food
company in North America, and was President of Kraft North American Food
Service from August 1996 to March 1998. Mr. Stockton worked for Kraft Foods,
Inc. for 22 years.
Item 2. Properties
Mattel owns its corporate headquarters in El Segundo, California, consisting
of 335,000 square feet, which is subject to a $42 million mortgage, and an
adjacent 55,000 square foot office building. Mattel also leases buildings in El
Segundo consisting of approximately 327,000 square feet. All segments use these
facilities. Mattel's Fisher-Price subsidiary owns its headquarters facilities
in East Aurora, New York, consisting of approximately 535,000 square feet,
which is used by the US Infant & Preschool segment. Pleasant Company owns its
headquarters facilities in Middleton, Wisconsin, consisting of approximately
420,000 square feet, which is used by the US Girls segment.
Mattel maintains leased sales offices in California, Illinois, New York,
North Carolina, Arkansas, Michigan, Georgia and Texas used by the Domestic
segment and leased warehouse and distribution facilities in California,
Kentucky, New Jersey, Wisconsin and Texas, all of which are used by the
Domestic segment. Mattel
10
owns a computer facility in Phoenix, Arizona used by all segments.
Internationally, Mattel has its principal offices and/or warehouse space in
Australia, Brazil, Canada, Chile, France, Germany, Hong Kong, Italy, Mexico,
The Netherlands, Spain, and the United Kingdom, all of which are leased and
which are used by the International segment. Mattel's principal manufacturing
facilities are located in China, Indonesia, Italy, Malaysia, Mexico and
Thailand. See Item 1 "Business--Manufacturing."
With respect to leases that are scheduled to expire during the next twelve
months, Mattel may negotiate new lease agreements, renew leases or utilize
alternative facilities. See Item 8 "Financial Statements and Supplementary
Data--Note 7 to the Consolidated Financial Statements." Mattel believes that
its owned and leased facilities, in general, are suitable and adequate for its
present and currently foreseeable needs.
Item 3. Legal Proceedings
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Litigation" and Item 8 "Financial Statements and
Supplementary Data--Note 7 to the Consolidated Financial Statements."
Item 4. Submission of Matters to a vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
For information regarding the markets in which Mattel's common stock, par
value $1.00 per share, is traded, see the cover page hereof. For information
regarding the high and low closing prices of the common stock for the last two
calendar years, see Item 8 "Financial Statements and Supplementary Data--Note
11 to the Consolidated Financial Statements."
As of March 22, 2002, Mattel had approximately 49,000 holders of record of
its common stock.
Mattel paid dividends on its common stock of $0.08 per share in January and
April 1999, and $0.09 per share in July and October 1999 and January, April,
July and October of 2000. As part of its financial realignment plan, Mattel
announced during the third quarter of 2000 a change in its dividend policy
consisting of a reduction in the annual cash dividend from $0.36 per share to
$0.05 per share. In 2001, a $0.05 per share dividend was declared by the board
of directors in November and paid in December. The payment of dividends on
common stock is at the discretion of Mattel's board of directors and is subject
to statutory and customary limitations.
12
Item 6. Selected Financial Data
For the Year Ended December 31, (a)(b)
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(In thousands, except per share and percentage
information)
Operating Results:
Net sales............... $4,804,062 $4,669,942 $4,595,490 $4,698,337 $4,778,663
Gross profit............ 2,266,884 2,100,785 2,182,021 2,309,795 2,364,085
% of net sales........ 47.2% 45.0% 47.5% 49.2% 49.5%
Operating profit (c).... 585,142 378,403 301,773 570,279 515,212
% of net sales........ 12.2% 8.1% 6.6% 12.1% 10.8%
Income from continuing
operations before
income taxes,
cumulative effect of
change in accounting
principles and
extraordinary item..... 430,010 225,424 170,164 459,446 425,082
Provision for income
taxes.................. 119,090 55,247 61,777 131,193 135,288
Income from continuing
operations before
cumulative effect of
change in accounting
principles and
extraordinary item..... 310,920 170,177 108,387 328,253 289,794
Loss from discontinued
operations (a)......... -- (601,146) (190,760) (122,200) (467,905)
Cumulative effect of
change in accounting
principles............. (12,001) -- -- -- --
Extraordinary item-loss
on early retirement of
debt................... -- -- -- -- (4,610)
Net income (loss)....... 298,919 (430,969) (82,373) 206,053 (182,721)
Income (Loss) Per Common
Share (d):
Income (loss) per common
share--Basic
Income from continuing
operations........... 0.72 0.40 0.25 0.82 0.76
Loss from discontinued
operations (a)....... -- (1.41) (0.46) (0.31) (1.27)
Cumulative effect of
change in accounting
principles........... (0.03) -- -- -- --
Extraordinary item.... -- -- -- -- (0.01)
Net income (loss)..... 0.69 (1.01) (0.21) 0.51 (0.52)
Income (loss) per common
share--Diluted
Income from continuing
operations........... 0.71 0.40 0.25 0.76 0.74
Loss from discontinued
operations (a)....... -- (1.41) (0.45) (0.29) (1.24)
Cumulative effect of
change in accounting
principles........... (0.03) -- -- -- --
Extraordinary item.... -- -- -- -- (0.01)
Net income (loss)..... 0.68 (1.01) (0.20) 0.47 (0.51)
Dividends Declared Per
Common Share (d)....... 0.05 0.27 0.35 0.31 0.27
As of Year End (a)(b)
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(In thousands)
Financial Position:
Total assets............ $4,540,561 $4,313,397 $4,673,964 $4,612,770 $3,915,059
Long-term liabilities... 1,205,122 1,407,892 1,145,856 1,124,756 808,297
Stockholders' equity.... 1,738,458 1,403,098 1,962,687 2,170,803 1,933,338
- --------
(a) Financial data for 1997 through 1999 reflect the retroactive effect of the
merger, accounted for as a pooling of interests, with The Learning Company,
Inc. ("Learning Company") in May 1999. As more fully described in Note 13
to the Consolidated Financial Statements, the Consumer Software segment,
which was comprised primarily of Learning Company, was reported as a
discontinued operation effective
13
March 31, 2000, and the consolidated financial statements were reclassified
to segregate the net investment in, and the liabilities and operating
results of the Consumer Software segment.
(b) Consolidated financial information for 1997 has been restated retroactively
for the effects of the March 1997 merger with Tyco Toys, Inc. ("Tyco"),
accounted for as a pooling of interests.
(c) Represents income from continuing operations before interest expense and
provision for income taxes.
(d) Per share data reflect the retroactive effect of the mergers with Learning
Company and Tyco in 1999 and 1997, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors That May Affect Future Results
(Cautionary Statement Under the Private Securities Litigation Reform Act of
1995)
Certain written and oral statements made or incorporated by reference from
time to time by Mattel or its representatives in this Annual Report on Form 10-
K, 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 and
may include, but are not limited to, statements about sales levels,
restructuring, special charges, other non-recurring charges, cost savings,
operating efficiencies and profitability. 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. 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 similar words or phrases. Management cautions you that forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially from the forward-looking statements. In addition to the
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 past results or those suggested by any forward-looking
statements.
Competition and New Product Introductions
Mattel's business and operating results depend largely upon the appeal of
its toy products. Consumer preferences are continuously changing. In recent
years there have been trends towards shorter life cycles for individual
products, the phenomenon of children outgrowing toys at younger ages--
particularly in favor of interactive and high technology products--and an
increasing use of high technology in toys. In addition, Mattel competes with
many other companies, both large and small, which means that Mattel's market
position is always at risk. Mattel's ability to maintain its current market
share, and increase its market share or establish market share in new product
categories, will depend on Mattel's ability to satisfy consumer preferences,
enhance existing products, develop and introduce new products, and achieve
market acceptance of such products. If Mattel does not successfully meet these
challenges in a timely and cost-effective manner, demand for its products will
decrease and Mattel's results of operations will suffer.
Seasonality, Managing Production and Predictability of Orders
Mattel's business is subject to risks associated with the underproduction of
popular toys and the overproduction of toys that do not match consumer demand.
Sales of toy products at retail are seasonal, with a majority of retail sales
occurring during the period from September through December. As a result,
Mattel's annual operating results will depend, in large part, on sales during
the relatively brief holiday season. Retailers are attempting to manage their
inventories better, requiring Mattel to ship products closer to the time the
retailers expect to sell the products to consumers. This in turn results in
shorter lead times for production.
14
Shortages of raw materials or components also may affect Mattel's ability to
produce products in time to meet retailer demand. These factors increase the
risk that Mattel may not be able to meet demand for certain products at peak
demand times, or that Mattel's own inventory levels may be adversely impacted
by the need to pre-build products before orders are placed.
Adverse General Economic Conditions
Mattel's results of operations may be negatively affected by adverse changes
in general economic conditions in the US and internationally, including adverse
changes in the retail environment. These adverse changes may be as a result of
softening global economies, wavering consumer confidence caused by the threat
or occurrence of terrorist attacks such as those in the US on September 11,
2001, or other factors affecting economic conditions generally. Such changes
may negatively affect the sales of Mattel's products, increase exposure to
losses for bad debt, or increase costs associated with manufacturing and
distributing these products.
Customer Concentration
A small number of Mattel's customers account for a large share of net sales.
For the year ended December 31, 2001, Mattel's three largest customers, Wal-
Mart, Toys "R Us and Target, in the aggregate accounted for approximately 50%
of net sales, and the ten largest customers in the aggregate accounted for
approximately 64% of net sales. The concentration of Mattel's business with a
relatively small number of customers may expose Mattel to a material adverse
effect if one or more of Mattel's large customers were to significantly reduce
purchases for any reason. In addition, some large chain retailers have begun to
sell private-label toys designed and branded by the retailers themselves. Such
toys may be sold at prices lower than comparable toys sold by Mattel, and may
result in lower purchases of Mattel-branded products by such retailers.
Rationalization of Mass Market Retail Channel and Bankruptcy of Key Customers
Many of Mattel's key customers are mass market retailers. The mass market
retail channel has experienced significant shifts in market share among
competitors in recent years, causing some large retailers to experience
liquidity problems. In 2001 and 2002, two large customers of Mattel filed for
bankruptcy. Mattel's sales to customers are typically made on credit without
collateral. There is a risk that customers will not pay, or that payment may be
delayed, because of bankruptcy or other factors beyond the control of Mattel.
This could increase Mattel's exposure to losses from bad debts. In addition, if
these or other customers were to cease doing business as a result of
bankruptcy, it could have a material adverse affect on Mattel's business,
financial condition and results of operations.
Litigation and Disputes
Mattel is involved in a number of litigation matters, including purported
securities class action claims stemming from the merger with The Learning
Company and the performance of the Learning Company division in the second half
of 1999. An unfavorable resolution of the pending litigation could have a
material adverse effect on Mattel's financial condition. The litigation may
result in substantial costs and expenses and significantly divert the attention
of Mattel's management regardless of the outcome. There can be no assurance
that Mattel will be able to achieve a favorable settlement of the pending
litigation or obtain a favorable resolution of such litigation if it is not
settled. In addition, current and future litigation, governmental proceedings,
labor disputes or environmental matters could lead to increased costs or
interruptions of normal business operations of Mattel.
Protection of Intellectual Property Rights
The value of Mattel's business depends to a large degree on its ability to
protect its intellectual property, including its trademarks, trade names,
copyrights, patents and trade secrets in the US and around the world.
15
Any failure by Mattel to protect its proprietary intellectual property and
information, including any successful challenge to Mattel's ownership of its
intellectual property or material infringements of such property, could have a
material adverse effect on Mattel's business, financial condition and results
of operations.
Political Developments, including Trade Relations, and the Threat or Occurrence
of Terrorist Activities
Mattel's business is worldwide in scope, including operations in 36
countries. The deterioration of the political situation in a country in which
Mattel has significant sales or operations, or the breakdown of trade relations
between the US and a foreign country in which Mattel has significant
manufacturing facilities or other operations, could adversely affect Mattel's
business, financial condition and results of operations. For example, a change
in trade status for China could result in a substantial increase in the import
duty of toys manufactured in China and imported into the US. In addition, the
occurrence or threat of terrorist activities, and the responses to and results
of such activities, could materially impact Mattel, its personnel and
facilities, its customers and suppliers, retail and financial markets and
general economic conditions.
Manufacturing Risk
Mattel 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. Mattel's business, financial position and results of
operations would be negatively impacted by a significant disruption to its
manufacturing operations or suppliers.
Financial Realignment Plan
Mattel announced a significant financial realignment plan in 2000, which was
designed to improve gross margins; selling and administrative expenses;
operating profit; and cash flow. See "2000 Financial Realignment Plan" and Item
8 "Financial Statements and Supplementary Data--Note 9 to the Consolidated
Financial Statements." The financial realignment plan requires substantial
management and financial resources to implement. The plan may not achieve
intended cost reductions or adequately address significant operating issues.
The failure of the plan to meet its objectives in whole or in part, or any
delay in implementing the plan, could have a material adverse effect on
Mattel's business, financial condition and results of operations. In 2002, as
part of the financial realignment plan, Mattel will commence a long-term
information technology strategy to help it better manage the business, while
lowering costs in procurement, finance, distribution and manufacturing. The
failure of this program to meet its objectives in whole or in part, or any
delay in implementing the program, could have a material adverse effect on
Mattel's business, financial condition and results of operations.
Financing Matters
Increases in interest rates, both domestically and internationally, could
negatively affect Mattel's cost of financing both its operations and
investments. Foreign currency exchange fluctuations may affect Mattel's
reportable income. Reductions in Mattel's credit ratings may negatively impact
the cost of satisfying Mattel's financing requirements.
Advertising and Promotion
Mattel's products are marketed worldwide through a diverse spectrum of
advertising and promotional programs. Mattel's ability to sell products is
dependent in part upon the success of such programs. If Mattel does not
successfully market its products or if media or other advertising or
promotional costs increase, these factors could have a material adverse affect
on Mattel's business, financial condition and results of operations.
16
Success of New Initiatives
Mattel has announced initiatives to improve the execution of its core
business, globalize and extend Mattel's brands, catch new industry trends and
develop employees. Successful implementation of Mattel's initiatives will
require substantial resources and the attention of Mattel's management team.
Failure to successfully implement any of these initiatives could have a
material adverse effect on Mattel's business, financial condition and results
of operations.
Changes in Laws and Regulations
Mattel operates in a highly regulated environment in the US and
internationally. US federal, state and local governmental entities and foreign
governments regulate many aspects of Mattel's business including its products
and the importation and export of its products. Such regulations may include
taxes, trade restrictions, regulations regarding financial matters,
environmental regulations and other administrative and regulatory restrictions.
Changes in laws or regulations may lead to increased costs or the interruption
of normal business operations.
Acquisition, Dispositions and Takeover Defenses
Mattel may engage in acquisitions, mergers or dispositions, which may affect
the profit, revenues, profit margins, debt-to-equity ratios, capital
expenditures, or other aspects of Mattel's business. In addition, Mattel has
certain anti-takeover provisions in its charter and by-laws that may make it
more difficult for a third party to acquire Mattel without its consent, which
may adversely affect Mattel's stock price.
If any of the risks and uncertainties described in the cautionary factors
listed above actually occur, Mattel's business, financial condition and results
of operations could be materially and adversely affected. The factors listed
above are not exhaustive. Other sections of this Annual Report on Form 10-K
include additional factors that 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 factors
emerge from time to time and it is not possible for management to predict the
impact of all such 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
rely on forward-looking statements as a prediction of actual results. Any or
all of the forward-looking statements contained in this Annual Report on Form
10-K and any other public statement made by Mattel or its representatives may
turn out to be wrong. Mattel expressly disclaims any obligation to update or
revise any forward-looking statements, whether as a result of new developments
or otherwise.
Summary
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes. See Item 8 "Financial Statements
and Supplementary Data." Mattel's consolidated financial statements for all
periods present the Consumer Software segment as a discontinued operation. See
"Discontinued Operations." Unless otherwise indicated, the following discussion
relates only to Mattel's continuing operations. Additionally, the segment and
brand category information was restated from the prior year presentation to
conform to the current management structure. See "Business Segment Results."
Mattel designs, manufactures, and markets a broad variety of toy products on
a worldwide basis through both sales to retailers (i.e., "customers") 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 that have historically
had worldwide sustainable appeal, to create new brands utilizing its knowledge
of children's play patterns and to
17
target customer and consumer preferences around the world. Mattel also intends
to expand its core brands through the Internet, and licensing and entertainment
partnerships.
Mattel's portfolio of brands and products are grouped in the following
categories:
Girls--including Barbie(R) fashion dolls and accessories, collector dolls,
Polly Pocket!(R), Diva Starz(TM), What's Her Face!(TM) and American Girl(R)
Boys-Entertainment--including Hot Wheels(R), Matchbox(R), Hot Wheels(R)
Electric Racing, and Tyco(R) Radio Control vehicles and playsets
(collectively "Wheels"), and Disney, Nickelodeon(R), Harry Potter(TM), Max
Steel(TM), and games and puzzles (collectively "Entertainment")
Infant & Preschool--including Fisher-Price(R), Power Wheels(R), Sesame
Street(R), Disney preschool and plush, Winnie the Pooh(R), Blue's Clues(R),
See "N Say(R), Magna Doodle(R), and View-Master(R)
Results of Continuing Operations
2001 Compared to 2000
Consolidated Results
Net income from continuing operations for 2001 was $310.9 million or $0.71
per diluted share as compared to net income from continuing operations of
$170.2 million or $0.40 per diluted share in 2000. Profitability in 2001 was
negatively impacted by $50.2 million of charges related to the financial
realignment plan and a $5.5 million charge related to a pre-tax loss on
derivative instruments. The combined effect of these items resulted in pre-tax
charges totaling $55.7 million, approximately $41 million after-tax or $0.10
per diluted share. Profitability in 2000 was negatively impacted by a $125.2
million pre-tax charge related to the initial phase of the financial
realignment plan, a $53.1 million pre-tax charge for the departure of certain
senior executives in the first quarter, and an $8.4 million pre-tax charge
related to losses realized on the disposition of a portion of the stock
received as part of the sale of CyberPatrol. These charges were partially
offset by a $7.0 million reversal of the 1999 reserve related to restructuring
and other charges. The combined effect of these items resulted in net pre-tax
charges totaling $179.7 million, approximately $123 million after-tax or $0.29
per diluted share.
The following table provides a comparison of the reported results and the
results excluding charges (in millions):
For the Year
-----------------------------------------------------
2001 2000
-------------------------- --------------------------
Reported Results Reported Results
Results Charges Ex. Chgs Results Charges Ex. Chgs
-------- ------- -------- -------- ------- --------
Net sales........................ $4,804.1 $ -- $4,804.1 $4,669.9 $ -- $4,669.9
======== ====== ======== ======== ======= ========
Gross profit..................... $2,266.9 $(28.2) $2,295.1 $2,100.8 $ (78.6) $2,179.4
Advertising and promotion
expenses........................ 661.5 0.3 661.2 685.9 4.8 681.1
Other selling and administrative
expenses........................ 936.1 1.5 934.6 967.0 59.0 908.0
Amortization of intangibles...... 51.1 -- 51.1 52.0 0.5 51.5
Restructuring and other charges.. 15.7 15.7 -- 15.9 15.9 --
Other expense (income), net...... 17.4 10.0 7.4 1.6 20.9 (19.3)
-------- ------ -------- -------- ------- --------
Operating income................. 585.1 (55.7) 640.8 378.4 (179.7) 558.1
Interest expense................. 155.1 -- 155.1 153.0 -- 153.0
-------- ------ -------- -------- ------- --------
Income from continuing operations
before income taxes............. $ 430.0 $(55.7) $ 485.7 $ 225.4 $(179.7) $ 405.1
======== ====== ======== ======== ======= ========
18
The year 2001 presented substantial obstacles for Mattel. Global economies
softened; the September 11th terrorist attacks eroded US consumer confidence;
and as a result, several important US retailers cancelled holiday reorders as
they intensified their focus on inventory management in light of uncertain
consumer spending prospects. The difficult retail environment, combined with
increased competitive pressures, resulted in a weakening in the financial
strength of some major US retail industry participants. Kmart, the second
largest US retailer, filed for bankruptcy in January 2002. On March 8, 2002,
Kmart announced plans to close 284 stores. This action will likely have a
negative impact on Mattel's US sales growth in 2002.
Net sales from continuing operations for 2001 increased 3% to $4.8 billion,
from $4.7 billion in 2000. In local currency, net sales were up 4% compared to
2000. Net sales within the US declined less than 1% from 2000 and accounted for
69% of consolidated net sales in 2001 compared to 71% in 2000. In 2001, net
sales outside the US increased 11% from 2000. Excluding the unfavorable foreign
currency exchange impact, international net sales increased 13% compared to
2000.
Worldwide gross sales in the Girls category, which includes American
Girl(R), increased 3%, or 4% in local currency, to $2.2 billion. Domestic sales
declined by 4%, while international sales increased by 17%, or 20% in local
currency. The growth in the Girls category was driven by Polly Pocket!(R), Diva
Starz(TM), What's Her Face!(TM), American Girl(R) and international sales of
Barbie(R). Worldwide Barbie(R) sales decreased 3% in both US dollars and in
local currency. Barbie(R) sales in the US declined 12% in 2001 as compared to
the strong growth recorded last year, when sales increased 9% over 1999. The
decline in US Barbie(R) sales was largely due to lower shipments of Holiday
Celebration(TM) Barbie(R) in response to lower demand at retail, lower sales of
adult-targeted collector dolls resulting from a weakening retail climate for
higher-priced collectible items, and continuing inventory management by
retailers. International sales for Barbie(R) were up 12%, or 15% in local
currency, reflecting the benefit of early product availability and stronger
alignment of worldwide sales and marketing plans.
Worldwide gross sales in the Boys-Entertainment category grew 6%, or 7% in
local currency, to $1.3 billion. Domestic sales grew by 2%, while international
sales increased by 13%, or 16% in local currency. The worldwide Wheels business
increased 1% due to a 9% sales growth in Hot Wheels(R) products, which was
partially offset by declines in the Matchbox(R) and Tyco(R) Radio Control
brands. The Entertainment business grew 14%, largely due to the global
introduction of Harry Potter(TM) products. Sales generated by the Harry
Potter(TM) brand more than offset the decline of the Disney entertainment
business, which will be completely phased out in 2002. In second quarter 2001,
Mattel expanded its games business through the acquisition of Pictionary(R)
Inc. ("Pictionary(R)"), worldwide owner of the Pictionary(R) game brand and
associated rights. Beginning in January 2002, Mattel will manufacture, market
and distribute Pictionary(R) to international markets. In the US and Canada,
Mattel is the licensor of the property through an independent contractor.
Worldwide sales in the Infant & Preschool category were $1.6 billion, down
1% both in US dollars and in local currency. Domestic sales were flat, while
international sales decreased 4%, or 3% in local currency. Growth in sales of
core Fisher-Price(R) and Power Wheels(R) products was offset by a decline in
licensed character brands. In 2001, Mattel executed a worldwide license
agreement to sell Barney(TM) products, the full impact of which will be
included in 2002 sales of licensed character brands.
Gross profit, as a percentage of net sales, was 47.2% in 2001 compared to
45.0% in 2000. Cost of sales in 2001 includes a $28.2 million charge, largely
related to accelerated depreciation resulting from the planned closure of the
Murray, Kentucky manufacturing facility ("North American Strategy") and
termination of a licensing agreement as part of the financial realignment plan.
Cost of sales in 2000 includes a $78.6 million charge related to the
termination of a variety of licensing agreements and other contractual
arrangements and elimination of product lines that did not deliver an adequate
level of profitability. Excluding the financial realignment plan charges, gross
profit, as a percentage of net sales, was up by 110 basis points to 47.8% in
2001 versus 46.7% a year ago. Gross profit was positively impacted by savings
realized from the financial realignment plan and lower product costs achieved
through the supply chain initiative, partially offset by the negative impact of
foreign exchange. The supply chain initiative has focused on improving customer
service
19
levels by partnering with retailers to get the right products in the right
place at the right time, lowering costs by restructuring Mattel's manufacturing
and distribution facilities, and improving processes such as launching fewer
new SKU's by taking advantage of multi-lingual packaging. The multi-lingual
packaging provides Mattel with increased distribution options for any given
toy.
Advertising and promotion expense was 13.8% of net sales for 2001, compared
to 14.7% in 2000. Advertising and promotion expense for 2001 and 2000 includes
$0.3 million and $4.8 million of charges, respectively, largely related to
exiting certain product lines. Excluding these financial realignment charges,
advertising and promotion expenses, as a percentage of net sales, declined from
14.6% in 2000 to 13.8% in 2001, largely due to lower prices charged by media
companies on a cost per rating point basis. Mattel's 2001 media plan was
actually stronger than last year's in terms of gross rating points. Mattel
expects media costs for 2002 will remain at approximately the same level for
the first half of the year, and will likely increase towards the second half of
the year. Beginning in 2002, advertising and promotion expenses related to
certain customer benefits will be recorded as an adjustment to net sales in
accordance with Emerging Issues Task Force ("EITF") No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer. Prior years' results will be
retroactively restated to reflect this change. See "New Accounting
Pronouncements."
Other selling and administrative expenses were $936.1 million or 19.5% of
net sales in 2001 compared to $967.0 million or 20.7% of net sales in 2000.
Other selling and administrative expenses in 2001 includes a $22.1 million
charge recorded in the fourth quarter related to the bankruptcy filing of Kmart
and a $1.5 million charge related to streamlining back office functions as part
of the financial realignment plan. The $22.1 million charge for the Kmart
bankruptcy represents approximately one-half of Mattel's outstanding pre-
petition account receivable after offsetting customer benefits, which Mattel
believes it is no longer obligated to pay to Kmart under the terms of its
customer agreement. Mattel's remaining pre-petition account receivable from
Kmart, after offsetting the reserve for bad debts and reserves for customer
benefits that were not earned by Kmart, is $36.2 million. To estimate the net
realizable value of the Kmart pre-petition account receivable, management
considered the post-petition market price for the Kmart bank debt, bonds and
trade receivables. Other selling and administrative expenses for 2000 includes
a $5.9 million charge related to settlement of certain litigation matters and a
$53.1 million charge related to termination costs for the departure of senior
executives. Excluding the aforementioned charges, other selling and
administrative expenses declined from 19.4% of net sales in 2000 to 19.0% of
net sales in 2001. The improvement in other selling and administrative
expenses, excluding the charges, is largely due to tight management of costs,
savings realized from the financial realignment plan, and a reduction in
management bonuses, partially offset by increased bad debt charges.
Other expense (income), net in 2001 includes a $5.5 million loss on
derivative instruments and $4.5 million of charges primarily related to asset
writedowns and other costs associated with implementing the North American
Strategy. Other expense (income), net in 2000 includes $12.5 million of charges
primarily related to the writeoff of certain noncurrent assets and an $8.4
million charge related to losses realized on the disposition of a portion of
the stock received as part of the sale of CyberPatrol. Excluding these charges,
other expense (income), net decreased from income of $19.3 million in 2000 to
expense of $7.4 million in 2001. The decline was primarily due to unfavorable
foreign exchange, lower investment income and increased charitable
contributions.
Interest expense was $155.1 million in 2001 compared with $153.0 million in
2000. The increase was due to the allocation in 2000 of $36.4 million in
interest to discontinued operations. In 2001, lower average borrowing rates and
lower short-term seasonal borrowings resulted in a decrease in interest
expense. For 2002, Mattel expects interest expense to decrease slightly
compared to 2001, reflecting the anticipated lower average borrowings combined
with increasing short-term interest rates beginning mid-year as Mattel moves
towards its peak borrowing period for seasonal working capital financing.
20
Business Segment Results
Mattel's reportable segments are separately managed business units and are
divided on a geographic basis between domestic and international. The domestic
segment is further divided into US Girls, US Boys-Entertainment, and US Infant
& Preschool. The US Girls segment includes brands such as Barbie(R), Polly
Pocket!(R), Diva Starz(TM), What's Her Face!(TM) and American Girl(R). The US
Boys-Entertainment segment includes Hot Wheels(R), Matchbox(R), Hot Wheels(R)
Electric Racing and Tyco(R) Radio Control (collectively "Wheels"), and Disney,
Nickelodeon(R), Harry Potter(TM), Max Steel(TM) and games and puzzles
(collectively "Entertainment") products. The US Infant & Preschool segment
includes Fisher-Price(R), Disney preschool and plush, Power Wheels(R), Sesame
Street(R) and other preschool products. The International segment sells
products in all toy categories.
Mattel's segments were revised in January 2001 to conform to the current
management structure. Specifically, the results of Pleasant Company, which had
been previously reported as part of Other, are now being reported as part of US
Girls, which is consistent with management responsibility for this business.
Additionally, Mattel's toy manufacturing unit is now being managed as a cost
center instead of as a profit center; therefore, toy manufacturing is no longer
being reported as a separate segment. Lastly, certain overhead costs incurred
at the headquarters' level in El Segundo, including facilities, information
technology, and other administration support costs, are now being allocated to
the US Girls and US Boys-Entertainment segments, to more accurately reflect the
costs associated with operating these businesses. These types of overhead costs
were already being reported as part of the US Infant & Preschool and
International segments since these businesses maintain their own, separate
headquarters locations. All prior periods have been restated to reflect these
changes.
As used in this Form 10-K, "sales" or "gross sales" means sales excluding
the impact of sales adjustments, such as trade discounts or other allowances.
"Net sales" includes the impact of such sales adjustments. Business Segment
Results should be read in conjunction with Item 8 "Financial Statements and
Supplementary Data--Note 10 to the Consolidated Financial Statements."
US Girls segment sales decreased by 4% in 2001 compared to 2000. A 12%
decline in Barbie(R) sales was partially offset by increased sales of Polly
Pocket!(R), Diva Starz(TM), What's Her Face!(TM) and American Girl(R). The
decrease in US Barbie(R) sales compared to 2000 was primarily due to lower
shipments of Holiday Celebration(TM) Barbie(R) in response to lower demand at
retail, lower sales of adult-targeted collector dolls resulting from a
weakening retail climate for higher-priced collectible items, and continuing
inventory management by retailers. US Boys-Entertainment segment sales
increased 2%. The US Entertainment business grew 6%, largely due to increased
sales of Harry Potter(TM) products. The US Wheels business was flat with last
year as increased sales of Hot Wheels(R) products were offset by declines in
Tyco(R) Radio Control and Matchbox(R). US Infant & Preschool segment sales were
flat with 2000. Growth in sales of core Fisher-Price(R) and Power Wheels(R)
products was offset by a decline in sales of licensed character brand products.
Management believes the difficult retail environment, especially combined with
the events of September 11, 2001, caused its retail customers to curtail their
orders across all of the US segments during the fourth quarter, resulting in an
8% decline in total US sales for the fourth quarter. However, despite weaker-
than-expected shipments to retailers, all of Mattel's major brands showed
strength with consumers and posted sales increases at retail. According to NPD
industry data for toy sales at the consumer level, Mattel gained market share
in the US in dolls, vehicles, action figures, games and puzzles and core infant
and preschool categories. Mattel's market share of total traditional toys grew
1.2 percentage points to 23.5% in the US.
International segment sales increased by 10% in 2001 compared to 2000.
Excluding the unfavorable foreign exchange impact, sales grew by 13% due to
double digit growth in Barbie(R), Polly Pocket!(R), core Fisher-Price(R) and
Hot Wheels(R) products combined with the expansion of Diva Starz(TM) and Harry
Potter(TM) products. Mattel also recorded strong market share gains outside the
US, with market share growing in the five major European markets, as well as in
Canada, Mexico and Australia. Improved product availability, better alignment
of worldwide marketing and sales plans and strong product launches were the
primary drivers for the growth in International segment sales and market share.
21
Operating profit in the US Girls segment decreased by 2%, primarily due to
lower sales volume. Operating profit in the US Boys-Entertainment segment
increased 39%, primarily due to increased sales volume and improved margins.
Operating profit in the US Infant & Preschool segment increased 2%, primarily
due to improved margins, partially offset by higher selling and administrative
expenses to support certain new product lines. All the US segments benefited
from lower costs per rating point for media purchases. The International
segment operating profit increased 26%, largely due to increased sales volume
and improved margins, partially offset by lower operating profit in certain
Latin American countries and unfavorable foreign exchange. In Latin America,
Mattel has appointed a new management team with the goal of converting sales
growth into increased cash flow and profitability in this region.
2000 Compared to 1999
Consolidated Results
Net income from continuing operations for 2000 was $170.2 million or $0.40
per diluted share as compared to net income from continuing operations of
$108.4 million or $0.25 per diluted share in 1999. Profitability in 2000 was
negatively impacted by a $125.2 million pre-tax charge related to the initial
phase of the financial realignment plan, a $53.1 million pre-tax charge for the
departure of certain senior executives in the first quarter, and an $8.4
million pre-tax charge related to losses realized on the disposition of a
portion of the stock received as part of the sale of CyberPatrol. These charges
were partially offset by a $7.0 million reversal of the 1999 reserve related to
restructuring and other charges. The combined effect of theses items, resulted
in a pre-tax net charge of $179.7 million, approximately $123 million after-tax
or $0.29 per diluted share. Profitability in 1999 was negatively impacted by a
$281.1 million charge, approximately $218 million after-tax or $0.51 per
diluted share, related to restructuring and other charges.
The following table provides a comparison of the reported results and the
results excluding charges (in millions):
For the Year
-------------------------------------------------------
2000 1999
-------------------------- ---------------------------
Reported Results Reported Results
Results Charges Ex. Chgs Results Charges Ex. Chgs
-------- ------- -------- -------- ------- --------
Net sales........................ $4,669.9 $ -- $4,669.9 $4,595.5 $ -- $4,595.5
======== ======= ======== ======== ======= ========
Gross profit..................... $2,100.8 $ (78.6) $2,179.4 $2,182.0 $ -- $2,182.0
Advertising and promotion
expenses........................ 685.9 4.8 681.1 684.5 -- 684.5
Other selling and administrative
expenses........................ 967.0 59.0 908.0 867.9 867.9
Amortization of intangibles...... 52.0 0.5 51.5 52.0 -- 52.0
Restructuring and other charges.. 15.9 15.9 -- 281.1 281.1 --
Other expense (income), net...... 1.6 20.9 (19.3) (5.3) -- (5.3)
-------- ------- -------- -------- ------- --------
Operating income................. 378.4 (179.7) 558.1 301.8 (281.1) 582.9
Interest expense................. 153.0 -- 153.0 131.6 -- 131.6
-------- ------- -------- -------- ------- --------
Income from continuing operations
before income taxes............. $ 225.4 $(179.7) $ 405.1 $ 170.2 $(281.1) $ 451.3
======== ======= ======== ======== ======= ========
Net sales from continuing operations for 2000 increased 2% to $4.7 billion,
from $4.6 billion in 1999. In local currency, net sales were up 4% in 2000
compared to 1999. Net sales within the US increased 4% and accounted for 71% of
consolidated net sales in 2000 compared to 70% in 1999. Net sales outside the
US decreased 3% from 1999. Excluding the unfavorable exchange impact,
international net sales increased 6% compared to 1999.
Worldwide gross sales in the Girls category, which includes American
Girl(R), increased 5%, or 8% in local currency, to $2.1 billion. Domestic sales
increased by 10%, while international sales decreased by 4%. The worldwide
growth in the Girls category was due to increased sales of Barbie(R) and
American Girl(R) products,
22
partially offset by decreased sales of large dolls. Worldwide Barbie(R) sales
increased 5%, up 9% in the US and down 1% in international markets. Excluding
the unfavorable exchange impact, Barbie(R) sales were up 8% in international
markets.
Worldwide gross sales in the Boys-Entertainment category were flat, or up 2%
in local currency. Domestic sales decreased by 4%, while international sales
increased by 7%, or 14% in local currency. The Boys-Entertainment category was
negatively impacted by lower sales of Toy Story 2 products in 2000 compared to
1999. Excluding the impact of Toy Story 2 and Harry Potter(TM) products, the
Boys-Entertainment category grew 2% for the year. Worldwide Wheels sales
decreased 2%, or were flat before the unfavorable impact of foreign exchange.
Sales of Entertainment products increased 2% worldwide, driven by strength of
Max Steel(TM), Mattel games and Harry Potter(TM) products, partially offset by
lower sales of Toy Story 2 products.
Worldwide gross sales in the Infant & Preschool category were flat, or up 3%
in local currency. Domestic sales grew by 4%, while international sales
decreased by 10%, or 2% in local currency. Worldwide sales of core Fisher-
Price(R) products grew 26%, up 37% in the US and flat in international markets.
Excluding the unfavorable exchange impact, core Fisher-Price(R) products were
up 11% in international markets. Declines in worldwide sales for Sesame
Street(R), Disney preschool and Winnie the Pooh(R) offset domestic growth in
core Fisher-Price(R) products.
Gross profit, as a percentage of net sales, was 45.0% in 2000 compared to
47.5% in 1999. Cost of sales in 2000 includes a $78.6 million charge related to
the termination of a variety of licensing agreements and other contractual
arrangements and elimination of product lines that did not deliver an adequate
level of profitability. Excluding financial realignment plan charges, gross
profit was 46.7% in 2000 compared to 47.5% in 1999 due to unfavorable product
mix, unfavorable foreign exchange rates and higher shipping costs.
Advertising and promotion expense was 14.7% of net sales in 2000 compared to
14.9% in 1999. Excluding the $4.8 million financial realignment plan charge,
largely related to exiting certain product lines, advertising and promotion
expenses, as a percentage of net sales, was 14.6% in 2000. The decrease was
attributable to improved efficiencies of promotional spending.
Other selling and administrative expenses were 20.7% of net sales in 2000
compared to 18.9% in 1999. Excluding the $5.9 million charge related to
settlement of certain litigation matters and the $53.1 million charge related
to termination costs for the departure of senior executives, other selling and
administrative expenses were 19.4% of net sales in 2000. The increase was
largely due to compensation costs incurred for the recruitment and retention of
senior executives.
Other expense (income), net in 2000 includes a $12.5 million charge
primarily related to the writeoff of certain noncurrent assets and an $8.4
million charge related to losses realized on the disposition of a portion of
the stock received as part of the sale of CyberPatrol. Excluding these charges,
the $14.1 million increase in other expense (income), net was largely due to
investment and interest income.
Interest expense was $153.0 million in 2000 compared with $131.6 million in
1999, largely due to higher borrowings necessitated by the funding of Mattel's
Consumer Software business. In addition, Mattel's overall interest rate was
higher due to increased market rates and debt refinancing that occurred during
the second half of the year.
Business Segment Results
US Girls segment sales increased by 10% in 2000 compared to 1999 due to a 9%
increase in sales of Barbie(R) products and a 7% increase in sales of American
Girl(R) products. US Boys-Entertainment segment sales decreased 4% due to a 3%
decrease in sales of Wheels products and a 7% decrease in sales of
Entertainment products. Within the Wheels category, Mattel gained market share.
However, sales fell below 1999 levels as relatively high retail inventories
were adjusted down throughout 2000. Within the Entertainment
23
category, growth from Max Steel(TM) and Mattel games were more than offset by
lower sales of movie-related toy products relative to the 1999 strong sales of
Toy Story 2 products. Excluding Harry Potter(TM) and Toy Story 2, Entertainment
sales were up 10% in domestic markets. US Infant & Preschool segment sales
increased 4%, 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.
International segment sales decreased by 3% in 2000 compared to 1999.
Excluding the unfavorable foreign exchange impact, sales grew by 6% in 2000 due
to increased sales across all core categories, including Barbie(R), Fisher-
Price(R), Wheels and Entertainment products.
Operating profit in the US Girls segment increased by 9%, largely due to
higher sales volume. The US Boys-Entertainment segment experienced a 26%
decline in operating profit, largely due to lower sales volume and higher
shipping costs. Operating profit in the US Infant & Preschool segment increased
7% due to greater sales of relatively higher margin core Fisher-Price(R)
products. The International segment operating profit decreased 19%, largely due
to unfavorable foreign exchange rates.
2000 Financial Realignment Plan
During the third quarter of 2000, Mattel initiated a financial realignment
plan designed to improve gross margin; selling and administrative expenses;
operating profit; and cash flow. The financial realignment plan, together with
the disposition of Learning Company, was part of management's strategic plan to
focus on growing Mattel's core brands and lowering operating costs and interest
expense. The plan will require a total pre-tax charge estimated at
approximately $250 million or $170 million on an after-tax basis, of which
approximately $100 million represents cash expenditures and $70 million
represents non-cash writedowns. Total cash outlay will be funded from existing
cash balances and internally generated cash flows from operations.
Under the plan, Mattel expects to generate approximately $200 million of
cumulative pre-tax cost savings over the three year duration of the plan.
Mattel recognized savings of approximately $55 million in 2001 and expects to
achieve savings of approximately $65 million in 2002. However, there is no
assurance that Mattel will be able to successfully implement all phases of its
financial realignment plan or that it will realize the anticipated cost savings
and improved cash flows.
Through December 31, 2001, Mattel has recorded pre-tax charges totaling
$175.4 million, or approximately $119 million on an after-tax basis, related to
this plan. Of the total charge, $125.2 million (approximately $84 million
after-taxes) was recorded in 2000 and $50.2 million (approximately $35 million
after-taxes) was recorded in 2001. In accordance with generally accepted
accounting principles, future pre-tax implementation costs of approximately $75
million have not been accrued as of December 31, 2001. Management expects these
costs will be recorded over approximately the next two years.
The following are the major initiatives included in the financial
realignment plan:
. Reduce excess manufacturing capacity;
. Terminate a variety of licensing and other contractual arrangements that
do not deliver an adequate level of profitability;
. Eliminate product lines that do not meet required levels of
profitability;
. Improve supply chain performance and economics;
. Eliminate positions at US-based headquarters locations in El Segundo,
Fisher-Price and Pleasant Company through a combination of layoffs,
elimination of open requisitions, attrition and retirements; and
. Close and consolidate certain international offices.
24
In April 2001, as part of the financial realignment plan, Mattel announced
the closure of its Murray, Kentucky manufacturing facility (the "North American
Strategy"). Production from this facility will be consolidated into other
Mattel-owned and operated facilities in North America with the final shutdown
of Murray operations occurring in 2002. This action is one of the realignment
measures taken to lower costs. Mattel believes this action was necessary in
order to maintain a competitive cost structure in today's global marketplace.
In 2000, Mattel recorded a $22.9 million pre-tax restructuring charge as
part of the initial phase of the financial realignment plan. This charge,
combined with a $7.0 million adjustment to the 1999 restructuring plan,
resulted in $15.9 million of net pre-tax restructuring and other charges in
2000. The $22.9 million charge related to the elimination of positions at
headquarters locations in El Segundo, Fisher-Price and Pleasant Company,
closure of certain international offices, and consolidation of facilities.
During 2001, Mattel recorded a $15.7 million pre-tax restructuring charge as
part of the financial realignment plan, largely related to the North American
Strategy. Total worldwide headcount reduction as a result of the restructuring
is planned to be approximately 1,700 employees, of which approximately 1,100
are related to the North American Strategy. From inception through December 31,
2001, a total of approximately $19 million has been incurred related to the
termination of nearly 980 employees, of which approximately 640 were terminated
during 2001.
The components of the restructuring charges are as follows (in millions):
Balance Balance
2000 Amounts Dec. 31, 2001 Amounts Dec. 31,
Charges Incurred 2000 Charges Incurred 2001
------- -------- -------- ------- -------- --------
Severance and other
compensation............. $19 $(3) $16 $ 9 $(16) $ 9
Asset writedowns.......... 2 (2) --
Lease termination costs... 1 -- 1 2 (1) 2
Other..................... 1 -- 1 5 (5) 1
--- --- --- --- ---- ---
Total restructuring
charge................... $23 $(5) $18 $16 $(22) $12
=== === === === ==== ===
In January 2002, as part of the financial realignment plan, Mattel announced
a further headcount reduction of approximately 240 positions at its domestic
headquarters locations through a combination of layoffs, elimination of open
requisitions, attrition and retirements.
Additionally, in 2002, Mattel will commence a long-term information
technology strategy aimed at achieving operating efficiencies and cost savings
across all disciplines. The program is focused on simplifying Mattel's
organization by defining common global processes based on industry best
practices, streamlining its organization by eliminating redundancies, and
upgrading its systems to have greater visibility to information and data on a
global basis.
1999 Restructuring and Other Charges
During 1999, Mattel initiated a restructuring plan for its continuing
operations and incurred certain other charges totaling $281.1 million,
approximately $218 million after-tax. The 1999 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. As of December 31, 2000, the restructuring
activities provided for by this charge were complete and substantially all
amounts previously accrued had been paid as of December 31, 2001.
Other charges incurred in 1999 principally related to the 1998 recall of
Mattel's Power Wheels(R) vehicles and environmental remediation costs related
to a former manufacturing facility on a leased property in Beaverton, Oregon.
The liability remaining related to these charges was approximately $22 million
and $24 million at December 31, 2001 and 2000, respectively.
25
Income Taxes
The effective income tax rate on continuing operations was 27.7% in 2001
compared to 24.5% in 2000 and 36.3% in 1999. The difference in the overall tax
rate on continuing operations between 1999, 2000 and 2001 was caused by the
restructuring and other charges. In 1999, a significant portion of the
restructuring expenses consisted of transactional expenses which were not
deductible for tax purposes, resulting in a lower effective tax benefit on
these restructuring charges, and a higher overall effective tax rate. In 2000
and 2001, most of the restructuring and other charges were deductible for tax
purposes and provided a benefit at or near the effective US tax rate, resulting
in a relatively lower overall effective tax rate for 2001 and 2000 as compared
to 1999.
The pre-tax income (loss) from US operations includes interest expense,
amortization of intangibles and corporate headquarters expenses. Therefore, the
pre-tax income (loss) 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.
The Internal Revenue Service has completed its examination of the Mattel,
Inc. federal income tax returns through December 31, 1994 and is currently
examining Mattel's federal income tax returns for fiscal years 1995 through
1997.
Liquidity and Capital Resources
Mattel'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 continuing
operations, long-term debt issuances and short-term seasonal borrowings. Cash
flows from continuing operations could be negatively impacted by decreased
demand for Mattel's products, which could result from factors such as adverse
economic conditions and changes in public and consumer preferences, or
increased costs associated with manufacturing and distribution of products or
realized shortages in raw materials or component parts. Additionally, Mattel's
ability to issue long-term debt and obtain seasonal borrowing could be
adversely affected by factors such as an inability to meet its debt covenant
requirements, which include maintaining consolidated debt-to-capital and
interest coverage ratios, or a deterioration of Mattel's credit ratings.
Mattel's ability to conduct its operations could be negatively impacted should
these or other adverse conditions affect its primary sources of liquidity.
Operating Activities
Operating activities generated cash flows from continuing operations of
$756.8 million during 2001, compared to $555.1 million in 2000 and $430.5
million in 1999. The increase in cash flows from operating activities in 2001
was largely due to increased income from continuing operations and increased
cash collections. In addition, the disposition of Learning Company in the
fourth quarter 2000 resulted in improved cash flows since Mattel was no longer
required to fund this business.
Investing Activities
Mattel invested its cash flows during the last three years mainly in tooling
to support new products and construction of new manufacturing facilities. In
2001, Mattel acquired Pictionary(R) for approximately $29 million, of which
approximately $21 million was paid in 2001 and the remaining $8 million will be
paid over the next 3 years.
Financing Activities
In 2001, as part of Mattel's goal to improve its debt-to-capital ratio, cash
flows from operating activities were used to repay short-term borrowing
obligations. Additionally, Mattel announced during the third quarter of 2000 a
change in its dividend policy consisting of a reduction in the annual cash
dividend from $0.36 per share
26
to $0.05 per share when and as declared by the board of directors. The $0.05
per share annual dividend rate under the new dividend policy became effective
in December 2001. The reduction of the dividend resulted in annual cash savings
of approximately $132 million, which Mattel used to reduce debt. During 2001,
Mattel repaid $30.5 million of its medium-term notes, which became due in the
fourth quarter.
In 2000, Mattel received proceeds from the issuance of a term loan and Euro
Notes, which were used to repay its 6-3/4% Senior Notes upon maturity and to
support operating activities. In 1999, Mattel increased its short-term
borrowings to support its operating activities and to fund the Consumer
Software segment. During 1999, Mattel repaid $30.0 million of its medium-term
notes. During 2001, 2000 and 1999, Mattel paid dividends on its common stock
and, in 1999, Mattel repurchased treasury stock. In 2001 and 2000, Mattel did
not repurchase treasury stock.
Seasonal Financing
Mattel 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. Mattel's domestic unsecured committed revolving credit
facility provides $1.0 billion in short-term borrowings from a commercial bank
group. Within this facility, up to $300.0 million is available for non-recourse
sales of certain trade accounts receivable to the bank group as an additional
source of liquidity and to lower its borrowing cost. Such non-recourse sales
are made pursuant to an arrangement whereby certain of Mattel's subsidiaries
sell receivables to Mattel Factoring, Inc., which in turn sells those
receivables to the commercial bank group. Mattel Factoring, Inc. is a separate
special-purpose legal entity with its own assets and liabilities. This facility
was executed in 1998 for a term of five years, expiring in 2003. In March 2002,
Mattel amended and restated this facility into a $1.060 billion, 3-year
facility that expires in 2005 with substantially similar terms and conditions.
Additionally, during 2001, Mattel utilized a 364-day $400.0 million unsecured
committed credit facility with essentially the same terms and conditions as the
$1.0 billion revolving credit facility. Mattel has elected not to renew this
facility when it expires in March 2002, as it believes that cash on hand at the
beginning of 2002 and its $1.060 billion domestic unsecured committed revolving
facility will be sufficient to meet its seasonal working capital requirements
in 2002.
Mattel also has a $200.0 million senior unsecured term loan that matures in
July 2003. Interest is charged at various rates, ranging from a LIBOR-based
rate to the bank reference rate (3.66% as of December 31, 2001). Both the
unsecured credit facilities and term loan require Mattel to meet financial
covenants for consolidated debt-to-capital and interest coverage. Mattel was in
compliance with such covenants during 2001. In addition, Mattel 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 subsidiaries,
Mattel negotiates individual financing arrangements, generally with the same
group of banks that provided credit in the prior year. Foreign credit lines
total approximately $368 million, a portion of which is used to support letters
of credit. Mattel expects to extend these credit lines throughout 2002 and
believes available amounts will be adequate to meet its seasonal financing
requirements. Mattel also enters into agreements with banks of its foreign
subsidiaries for non-recourse sales of certain of its foreign subsidiary
receivables. In fourth quarter 2001, Mattel entered into a securitization
agreement to sell certain receivables of its French and German subsidiaries
with one of its European banks.
27
Mattel's accounts receivable sold or anticipated, and therefore excluded
from its consolidated balance sheets, is summarized as follows (in millions):
As of Year
End
-------------
2001 2000
------ ------
Domestic factoring and anticipation.............................. $261.5 $347.5
Foreign factoring................................................ 237.2 196.9
------ ------
Total factoring and anticipation................................. $498.7 $544.4
====== ======
Financial Position
Mattel's cash and short-term investments increased by $384.2 million to
$616.6 million at year end 2001 compared to $232.4 million at year end 2000.
The increase was primarily due to cash flows generated from operating
activities. Accounts receivable, net decreased by $143.0 million to $696.6
million at year end 2001, reflecting improved cash collections and the bad debt
write-off resulting from the bankruptcy of Kmart. Inventories decreased
slightly to $487.5 million at year end 2001. Inventory levels were negatively
impacted by lower than expected domestic fourth quarter sales and the pre-build
initiative to prepare for the closing of the Murray, Kentucky plant in 2002 in
connection with the North American Strategy. During 2002, Mattel plans to
continue to build inventory levels for preschool products in conjunction with
executing the North American Strategy. Mattel intends to continue its plan to
move towards more optimal accounts receivable and inventory levels through its
focus on improving its supply chain performance. Prepaid expenses and other
current assets increased by $102.1 million to $291.9 million at year end 2001
compared to 2000, primarily due to increased prepaid income taxes and
receivable collections deposits with banks. Property, plant and equipment, net
decreased $21.1 million to $626.7 million at year end 2001, largely due to
depreciation, partially offset by capital spending. Intangibles decreased $26.9
million to $1.1 billion at year end 2001, mainly due to goodwill amortization,
partially offset by the acquisition of Pictionary(R) in June 2001. Other
noncurrent assets declined by $54.3 million to $711.3 million at year end 2001,
principally due to decreased noncurrent deferred tax assets.
Short-term borrowings decreased $188.3 million to $38.1 million at year end
2001 compared to $226.4 million at year end 2000, due to the repayment of debt.
Current portion of long-term debt increased by $177.4 million to $210.1 million
at year end 2001, largely due to the reclassification of 200 million of Euro
Notes from long-term debt since they mature in July 2002.
A summary of Mattel's capitalization is as follows (in millions):
As of Year End
--------------------------
2001 2000
------------ ------------
Medium-term notes................................... $ 480.0 17% $ 510.0 18%
Senior notes........................................ 500.0 17 690.7 25
Other long-term debt obligations.................... 40.9 1 41.7 1
-------- --- -------- ---
Total long-term debt................................ 1,020.9 35 1,242.4 44
Other long-term liabilities......................... 184.2 6 165.5 6
Stockholders' equity................................ 1,738.5 59 1,403.1 50
-------- --- -------- ---
$2,943.6 100% $2,811.0 100%
======== === ======== ===
Total long-term debt decreased by $221.5 million at year end 2001 compared
to year end 2000 due to the aforementioned reclassification of 200 million of
Euro Notes and $30.0 million of medium-term notes maturing in the next twelve
months to current portion of long-term debt. Mattel expects to satisfy its
future long-term capital needs through the retention of corporate earnings and
the issuance of long-term debt instruments. Stockholders' equity of $1.7
billion at year end 2001 increased $335.4 million from year end 2000, primarily
as a result of income from continuing operations and cash received from
exercise of employee stock options, partially offset by payment of common
dividends and the unfavorable effect of foreign currency translation.
28
Mattel's total debt to capital ratio, including current portion of long-term
debt, improved from 52% at year end 2000 to 42% at year end 2001 due to the
repayment of debt combined with improvement in its operating results. Mattel
continues to target a goal of reducing the year end ratio to approximately one-
third of capital.
Commitments
In the normal course of business, Mattel enters into debt arrangements and
contractual arrangements for future purchases of goods and services to ensure
availability and timely delivery, and to obtain and protect Mattel's right to
create and market certain products. These arrangements include commitments for
future inventory purchases and licensing payments. Certain of these commitments
routinely contain provisions for guaranteed or minimum expenditures during the
term of the contracts.
Mattel's commitments for debt and other contractual arrangements is
summarized as follows (in thousands):
Payments Due by Period
------------------------------------------------
Total 2002 2003 2004 Thereafter
---------- -------- -------- -------- ----------
Long-term debt................. $1,231,009 $210,090 $380,849 $ 50,939 $589,131
Licensing minimums............. 379,000 106,000 84,000 81,000 108,000
Inventory purchases............ 121,000 121,000 -- -- --
Operating leases............... 168,100 38,800 29,800 26,800 72,700
Capitalized leases............. 10,100 300 300 300 9,200
---------- -------- -------- -------- --------
Total.......................... $1,909,209 $476,190 $494,949 $159,039 $779,031
========== ======== ======== ======== ========
Discontinued Operations
In May 1999, Mattel completed its merger with Learning Company, pursuant to
which Learning Company was merged with and into Mattel, with Mattel being the
surviving corporation. Due to substantial losses experienced in its Consumer
Software segment, which was comprised primarily of Learning Company, Mattel's
board of directors, on March 31, 2000, resolved to dispose of its Consumer
Software segment. As a result of this decision, the Consumer Software segment
was reported as a discontinued operation effective March 31, 2000, and the
consolidated financial statements were reclassified to segregate the net
investment in, and the liabilities and operating results of the Consumer
Software segment.
On October 18, 2000, Mattel disposed of Learning Company to an affiliate of
Gores Technology Group in return for a contractual right to receive future
consideration based on income generated from its business operations and/or the
net proceeds derived by the new company upon the sale of its assets or other
liquidation events, or 20% of its enterprise value at the end of five years. In
the fourth quarter of 2001, Mattel received proceeds totaling $10.0 million
from Gores Technology Group as a result of liquidation events related to Gores
Technology's sale of the entertainment and education divisions. Mattel also
incurred additional costs of approximately $10 million in 2001 related to the
wind down of the Consumer Software segment. Accordingly, no income was recorded
in the consolidated statement of operations for discontinued operations.
With respect to Gores Technology Group's disposition of the education
division, there is additional contingent consideration that may be received by
Mattel. At December 31, 2001, Mattel had net obligations related to its
discontinued Consumer Software segment of approximately $24 million. Mattel
believes that it has adequately reserved for future obligations of this
segment. Any additional proceeds that are recognized will be recorded as part
of the discontinued operations.
In December 2000 and January 2001, Mattel entered into worldwide, multi-year
licensing agreements with Vivendi Universal Publishing and THQ, respectively,
for the development and publishing of gaming, educational and productivity
software based on Mattel's brands, which Mattel had previously developed and
29
sold directly through its Mattel Media division. These partnerships allow
Mattel to provide the content from its library of brands, while Vivendi
Universal Publishing and THQ provide software development and distribution
expertise.
Litigation
Litigation Related to Learning Company
Following Mattel's announcement in October 1999 of the expected results of
its Learning Company division for 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, in the joint proxy statement for the merger of Mattel
and Learning Company and elsewhere, that artificially inflated the price of
Mattel's common stock.
In March 2000, these shareholder complaints were consolidated into two lead
cases: Thurber v. Mattel, Inc. et al. (containing claims under (S)10(b) of the
1934 Securities Exchange Act ("Act")) and Dusek v. Mattel, Inc. et al
(containing claims under (S)14(a) of the Act). In January 2001, the Court
granted defendants' motions to dismiss both Thurber and Dusek, and gave
plaintiffs leave to amend. In December 2001, the Court denied defendants'
motions to dismiss the amended complaints in both Thurber and Dusek. In each
case, the plaintiffs have asked for compensatory damages. Both Thurber and
Dusek are currently pending in the United States District Court for the Central
District of California.
Other purported class action litigation has 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. 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
consolidated complaint in In re Broderbund generally alleges that Learning
Company misstated its financial results prior to the time it was acquired by
Mattel. The defendants' motion to dismiss the complaint in In re Broderbund was
granted in May 2001, and the case was dismissed. The In re Broderbund
plaintiffs appealed the dismissal, and the case is currently pending before the
Ninth Circuit Court of Appeals. The plaintiffs have asked for compensatory
damages.
Several stockholders have filed derivative complaints on behalf and for the
benefit of Mattel, alleging, among other things, 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 its approval of severance packages to certain former executives. These
derivative actions have been filed in the Court of Chancery in Delaware, in Los
Angeles Superior Court in California, and in the United States District Court
for the Central District of California, and are all in a preliminary stage. The
plaintiffs have asked for unspecified monetary damages. Plaintiffs filed an
amended consolidated complaint in February 2002 in the California state court
actions and defendants have filed a demurrer seeking dismissal of that action.
Mattel believes that the actions are without merit and intends to defend
them vigorously.
Environmental
Fisher-Price
Fisher-Price has executed a consent order with the State of New York to
implement a groundwater remediation system at one of its former manufacturing
plants. The execution of the consent order was in response to the New York
State Department of Environmental Conservation Record of Decision issued in
March 2000. The Department approved a conceptual work plan in March 2001, with
work scheduled to begin in 2001. However, in response to concerns expressed by
a number of nearby residents, the Department has requested that Mattel postpone
implementation of the groundwater remediation plan until 2002 after the
30
installation of a public water line to those residents is completed. The
ultimate liability associated with this cleanup presently is estimated to be
approximately $1.76 million, approximately $1.26 million of which has been
incurred through December 31, 2001.
Beaverton, Oregon
Mattel previously operated 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. Mattel immediately closed the water supply and self-reported
the sample results to the Oregon Department of Environmental Quality and the
Oregon Health Division. Mattel also implemented a community outreach program to
employees, former employees and surrounding landowners.
In November 1998, Mattel and another potentially responsible party entered
into a consent order with the Oregon Department of Environmental Quality to
conduct a remedial investigation/feasibility study at the property, to propose
an interim remedial action measure, and to continue the community outreach
program. Mattel has recorded pre-tax charges totaling $19.0 million for
environmental remediation costs related to this property, based on the
completion and approval of the remediation plan and feasibility study.
Approximately $3 million has been incurred through December 31, 2001, largely
related to attorney fees, consulting work and an employee medical screening
program.
General
Mattel is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and labor,
which Mattel is addressing or defending in the ordinary course of business.
Management believes that resolving such matters is not likely to have a
material adverse effect on Mattel's business, financial condition or results of
operations.
Effects of Inflation
Inflation rates in the US and in major foreign countries where Mattel does
business have not had a significant impact on its results of operations or
financial position during the three years ended December 31, 2001. The US
Consumer Price Index increased 1.6% in 2001, 3.4% in 2000 and 2.7% in 1999.
Mattel receives some protection from the impact of inflation from high turnover
of inventories and its ability to pass on higher prices to consumers.
Employee Savings Plan
Certain employee savings plan provisions used by other companies can result
in requirements to hold substantial portions of a participant's account balance
in the stock of the sponsoring company, significantly increasing the exposure
of the account to market risk associated with a single company's stock.
However, the Mattel Personal Investment Plan is designed to allow participants
to limit their exposure to market changes in Mattel's stock price. Mattel makes
company contributions in cash and allows employees to allocate both individual
and company contributions to a balanced variety of investment funds.
Furthermore, Mattel's plan limits a participant's allocation to the Mattel
Stock Fund, which is fully invested in Mattel stock, to 50% of the account
balance. Participants may generally reallocate their account balances on a
daily basis. This reallocation is only limited for participants classified as
insiders who wish to change their investment in the Mattel Stock Fund. Insiders
are limited to certain window periods for making a reallocation out of or into
the Mattel Stock Fund.
Critical Accounting Policies and Estimates
Mattel makes certain estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses. The accounting policies described below are those Mattel
31
considers critical in preparing its consolidated financial statements. These
policies include significant estimates made by management using information
available at the time the estimates are made. However, as described below,
these estimates could change materially if different information or assumptions
were used.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents adjustments to customer trade
accounts receivable for amounts deemed partially or entirely uncollectible. The
allowance for doubtful accounts is a reserve used to reduce gross trade
receivables to their net realizable value. Mattel's reserve is based on
management's assessment of the business environment, customers' financial
condition, historical trends, receivable aging and customer disputes.
Mattel's allowance for doubtful accounts increased from approximately $25
million at year end 2000 to $56 million at year end 2001. In 2001, bad debt
expense increased by approximately $40 million to $58 million. As more fully
discussed in the section entitled "Results of Continuing Operations--2001
Compared to 2000--Consolidated Results," in the fourth quarter of 2001, Mattel
recorded a $22.1 million charge related to the Kmart bankruptcy filing
announced in January 2002. Mattel also recorded approximately $9 million in bad
debt expense in the third quarter 2001, primarily related to the bankruptcy
declared by a US retailer during the quarter. The remaining increase in bad
debt expense was due to exposure associated with various other retailers. The
difficult domestic retail environment has resulted in bankruptcies of large
customers and represents the underlying cause for the increased bad debt
expense in 2001. Mattel will continue to proactively review its credit risks
and adjust its customer terms to reflect the current environment. The increased
level of risk associated with credit given to customers may result in a
continuation of bad debt charges at higher levels than historically experienced
or lower sales.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are
stated at the lower of cost or market. Inventory reserves are recorded for
damaged, obsolete, excess and slow-moving inventory. Mattel's management uses
estimates to record these reserves. Slow-moving inventory is reviewed by
category and may be partially or fully reserved for depending on the type of
product and the length of time the product has been included in inventory.
Changes in public and consumer preferences and demand for product or changes in
the buying patterns and inventory management of customers, could adversely
impact the inventory valuation.
Impairment of Long-Lived Assets
Long-lived assets, identifiable intangibles and goodwill related to those
assets have been reviewed for impairment based on Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. This statement
requires that an impairment loss be recognized whenever the sum of the expected
future cash flows (undiscounted and without interest charges) resulting from
the use and ultimate disposal of an asset is less than the carrying amount of
the asset. Mattel's management reviews for indicators that might suggest an
impairment loss exists. Testing long-lived assets, identifiable intangibles and
goodwill for recoverability requires estimates of expected cash flows to be
generated from the use of the assets. Various uncertainties, including changes
in consumer preferences, deterioration in the political situation in a country
or adverse changes in the general economic conditions in the US and
internationally, could adversely impact the expected cash flows to be generated
by an asset or group of assets. See discussion under "New Accounting
Pronouncements" regarding SFAS No. 144, which supercedes SFAS No. 121 effective
the first quarter of 2002.
Deferred Tax Assets
Mattel records valuation allowances against its deferred tax assets. In
determining the requisite allowance, management considers all available
evidence for certain tax credit, net operating loss, and capital loss
carryforwards that would likely expire prior to their utilization. Management
believes that it is more likely than
32
not that Mattel will generate sufficient taxable income in the appropriate
carryforward periods to realize the benefit of its remaining net deferred tax
assets. However, if the available evidence were to change in the future, an
adjustment to the valuation allowances may be required.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations, which supercedes Accounting Principles Board
Opinion ("APB") No. 16, Business Combinations. This statement requires that all
business combinations be accounted for by the purchase method and establishes
specific criteria for the recognition of intangible assets separately from
goodwill. The statement also requires unallocated negative goodwill to be
written off immediately as an extraordinary gain. The provisions of the
statement apply to business combinations initiated after June 30, 2001. For
business combinations accounted for using the purchase method before July 1,
2001, the provisions of this statement will be effective in the first quarter
of 2002. Mattel does not expect that the adoption of SFAS No. 141 will have a
material effect on its consolidated financial position or results of
operations.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supercedes APB Opinion No. 17, Intangible Assets. This statement
addresses the accounting and reporting of goodwill and other intangible assets
subsequent to their acquisition. The statement also provides specific guidance
on testing goodwill and intangible assets for impairment. SFAS No. 142 provides
that (i) goodwill and indefinite-lived intangible assets will no longer be
amortized; (ii) impairment will be measured using various valuation techniques
based on discounted cash flows; (iii) goodwill will be tested for impairment at
least annually at the reporting unit level; (iv) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually; and
(v) intangible assets with finite lives will be amortized over their useful
lives. Goodwill and intangible assets acquired after June 30, 2001 were
subjected to the provisions of this statement. All provisions of this statement
will be effective in the first quarter of 2002. Mattel's goodwill amortization
was approximately $46 million of the total $51.1 million in amortization of
intangibles recorded in 2001. Mattel is in the process of evaluating the
potential impact that the adoption of SFAS No. 142 will have on its
consolidated financial position and results of operations. Based on preliminary
results of its valuation study, Mattel anticipates that the total impairment to
be recognized as a result of the transitional goodwill impairment test will be
approximately $400 million pretax, relating entirely to the Pleasant Company
reporting unit.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. All provisions of this statement will
be effective at the beginning of fiscal 2003. Mattel is in the process of
determining the impact of this statement on its financial results when
effective.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of and amends APB No. 30, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. This statement requires that long-lived assets that
are to be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for (a) recognition and measurement of the impairment of long-
lived assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. This statement also retains APB No. 30's requirement that
companies report discontinued operations separately from continuing operations.
All provisions of this statement will be effective in the first quarter of
2002. The adoption of this standard is not expected to have a significant
impact on Mattel's consolidated financial position and results of operations.
33
Emerging Issues Task Force ("EITF") Issue No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer, will be effective in the first
quarter of 2002. This issue addresses (i) recognition, measurement, and income
statement classification for sales incentives offered by a vendor without
charge to a customer as a result of a single exchange transaction or as a
result of attaining a specified cumulative level of transactions and (ii)
whether certain consideration from a vendor to a reseller of the vendor's
products is an adjustment to selling prices or cost. The following table
presents the quarterly and full year restated balances, excluding charges,
resulting from the implementation of EITF No. 01-09 (in millions):
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------- ------- -------- -------- --------
Year Ended December 31, 2001
Net sales..................... $715.2 $836.2 $1,575.3 $1,561.2 $4,687.9
Gross profit.................. 316.6 367.6 745.5 747.4 2,177.1
% of net sales................ 44.3% 44.0% 47.3% 47.9% 46.4%
Advertising and promotion
expenses..................... 79.4 84.9 174.9 204.0 543.2
Year Ended December 31, 2000
Net sales..................... $679.6 $803.0 $1,549.6 $1,533.3 $4,565.5
Gross profit.................. 299.9 348.3 703.7 719.9 2,071.8
% of net sales................ 44.1% 43.4% 45.4% 47.0% 45.4%
Advertising and promotion
expenses..................... 76.8 83.0 186.5 227.2 573.5
Year Ended December 31, 1999
Net sales..................... $676.0 $791.5 $1,557.4 $1,477.8 $4,502.7
Gross profit.................. 300.1 343.4 744.5 679.2 2,067.2
% of net sales................ 44.4% 43.4% 47.8% 46.0% 45.9%
Advertising and promotion
expenses..................... 75.9 80.6 185.3 227.9 569.7
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Risk Management
Mattel's results of operations and cash flows may be impacted by exchange
rate fluctuations. 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 using foreign currency forward exchange and option
contracts primarily to hedge its purchase and sale of inventory, and other
intercompany transactions denominated in foreign currencies. These contracts
generally have maturity dates of up to 18 months. In addition, Mattel manages
its exposure through the selection of currencies used for international
borrowings and intercompany invoicing. Mattel's results of operations can also
be affected by the translation of foreign revenues and earnings into US
dollars. Mattel does not trade in financial instruments for speculative
purposes.
As of December 31, 2001, Mattel translated its Argentina peso denominated
financial statements using the free floating market exchange rate as of January
11, 2002, of 1.6 pesos to the dollar. This translation did not have a
significant impact on Mattel's results of operations in 2001 and management
believes that the devaluation will have minimal impact to its results of
operations in 2002.
Mattel entered into a cross currency interest rate swap to convert the
interest rate and principal amount from Euros to US dollars on its 200 million
Euro Notes due July 2002. Interest is payable annually at the rate of Euro
6.625%. The weighted average interest rate after the swap is 9.0% in US
dollars.
34
Mattel's foreign currency forward exchange contracts that were used to hedge
firm foreign currency commitments as of December 31, 2001 are shown in the
following table. 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, Thai baht, Brazilian real and Venezuelan bolivar contracts
that are maintained by entities with either a rupiah, baht, real or bolivar
functional currency.
Buy Sell
-------------------------- --------------------------
Weighted Weighted
Average Average
(In thousands of US Contract Contract Fair Contract Contract Fair
dollars) Amount Rate Value Amount Rate Value
- ------------------- -------- -------- -------- -------- -------- --------
Euro*................... $128,041 0.88 $128,775 $346,861 0.90 $341,164
British pounds
sterling*.............. 5,159 1.45 5,144
Canadian dollar*........ 4,375 0.63 4,399 31,478 0.65 30,646
Japanese yen............ 4,045 128 3,966
Australian dollar*...... 3,045 0.51 3,064 9,941 0.52 9,659
Swiss franc............. 3,052 1.69 3,083
Indonesian rupiah....... 27,300 11,219 28,197
New Zealand dollar*..... 619 0.42 607
Venezuelan bolivar...... 2,000 761 1,968
Singapore dollar........ 2,873 1.83 2,843
Hong Kong dollar........ 30,282 7.81 30,315
Brazilian real.......... 27,206 2.66 24,801
Polish zloty............ 2,091 3.97 2,211
Taiwanese dollar........ 3,352 34.87 3,326
Thai baht............... 3,970 44.49 3,938
-------- -------- -------- --------
$231,316 $230,538 $404,374 $397,568
======== ======== ======== ========
* The currencies for these contracts are quoted in US dollar per local 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 2001. 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 2001. 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.
In addition to the contracts involving the US dollar detailed in the above
table, Mattel also had contracts to sell British pounds sterling for the
purchase of Euros. As of December 31, 2001, these contracts had a notional
amount of $79.5 million and a fair value of $80.7 million.
Had Mattel not entered into hedges to limit the effect of exchange rate
fluctuations on results of operations and cash flows, pre-tax income would have
been reduced by approximately $10 million, $35 million, and $16 million for
2001, 2000 and 1999, respectively.
In June 1998, the FASB issued SFAS 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.
Mattel adopted SFAS No. 133 on January 1, 2001. Mattel recorded a one-time
charge of approximately $12 million, net of tax, in the consolidated statements
of operations for the quarter ended March 31, 2001, for the transition
adjustment related to the adoption of SFAS No. 133.
Interest Rate Sensitivity
An assumed 50 basis point movement in interest rates affecting Mattel's
variable rate borrowings would have had an immaterial impact on its 2001
results of operations.
35
Item 8. Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and Stockholders of Mattel, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 74 present fairly, in all material
respects, the financial position of Mattel, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 74 presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of Mattel's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, 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 provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
January 30, 2002
36
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
2001 2000
---------- ----------
(In thousands)
ASSETS
- ------
Current Assets
Cash and short term investments........................ $ 616,604 $ 232,389
Accounts receivable, less allowances of $55.9 million
at December 31, 2001 and $24.6 million at December 31,
2000.................................................. 696,572 839,567
Inventories............................................ 487,505 489,742
Prepaid expenses and other current assets.............. 291,915 189,799
---------- ----------
Total current assets................................. 2,092,596 1,751,497
---------- ----------
Property, Plant and Equipment
Land................................................... 33,273 32,793
Buildings.............................................. 267,719 257,430
Machinery and equipment................................ 616,609 564,244
Capitalized leases..................................... 23,271 23,271
Leasehold improvements................................. 81,628 74,988
---------- ----------
1,022,500 952,726
Less: accumulated depreciation....................... 550,073 472,986
---------- ----------
472,427 479,740
Tools, dies and molds, net............................. 154,295 168,092
---------- ----------
Property, plant and equipment, net................... 626,722 647,832
---------- ----------
Other Noncurrent Assets
Intangibles, net....................................... 1,109,910 1,136,857
Other assets........................................... 711,333 765,671
Net investment in discontinued operations.............. -- 11,540
---------- ----------
$4,540,561 $4,313,397
========== ==========
37
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(continued)
December 31,
----------------------
2001 2000
---------- ----------
(In thousands, except
share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Short-term borrowings................................ $ 38,108 $ 226,403
Current portion of long-term debt.................... 210,090 32,723
Accounts payable..................................... 334,247 338,966
Accrued liabilities.................................. 774,743 703,382
Income taxes payable................................. 239,793 200,933
---------- ----------
Total current liabilities.......................... 1,596,981 1,502,407
---------- ----------
Long-Term Liabilities
Long-term debt....................................... 1,020,919 1,242,396
Other................................................ 184,203 165,496
---------- ----------
Total long-term liabilities........................ 1,205,122 1,407,892
---------- ----------
Stockholders' Equity
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 1.1 million and 1.9 million
outstanding exchangeable shares in 2001 and 2000,
respectively........................................ -- --
Common stock $1.00 par value, 1.0 billion shares
authorized; 436.3 million shares and 435.6 million
shares issued in 2001 and 2000, respectively........ 436,307 435,560
Additional paid-in capital........................... 1,638,993 1,706,614
Treasury stock at cost; 5.4 million shares and 9.6
million shares in 2001 and 2000, respectively....... (161,944) (288,622)
Retained earnings (accumulated deficit).............. 132,900 (144,417)
Accumulated other comprehensive loss................. (307,798) (306,037)
---------- ----------
Total stockholders' equity......................... 1,738,458 1,403,098
---------- ----------
$4,540,561 $4,313,397
========== ==========
The accompanying notes are an integral part of these statements.
Commitments and Contingencies (See accompanying notes.)
38
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands, except per share
amounts)
Net Sales................................. $4,804,062 $4,669,942 $4,595,490
Cost of sales............................. 2,537,178 2,569,157 2,413,469
---------- ---------- ----------
Gross Profit.............................. 2,266,884 2,100,785 2,182,021
Advertising and promotion expenses........ 661,504 685,877 684,519
Other selling and administrative
expenses................................. 936,078 966,998 867,955
Restructuring and other charges........... 15,700 15,900 281,107
Amortization of intangibles............... 51,144 52,000 52,010
Interest expense.......................... 155,132 152,979 131,609
Other expense (income), net............... 17,316 1,607 (5,343)
---------- ---------- ----------
Income From Continuing Operations Before
Income Taxes............................. 430,010 225,424 170,164
Provision for income taxes................ 119,090 55,247 61,777
---------- ---------- ----------
Income From Continuing Operations......... 310,920 170,177 108,387
Discontinued Operations (See Note 13)
Loss from discontinued operations......... -- (601,146) (190,760)
---------- ---------- ----------
Income (Loss) Before Cumulative Effect of
Change in Accounting Principles.......... 310,920 (430,969) (82,373)
Cumulative effect of change in accounting
principles, net of tax................... (12,001) -- --
---------- ---------- ----------
Net Income (Loss)......................... 298,919 (430,969) (82,373)
Preferred stock dividend requirements..... -- -- 3,980
---------- ---------- ----------
Net Income (Loss) Applicable to Common
Shares................................... $ 298,919 $ (430,969) $ (86,353)
========== ========== ==========
Basic Income (Loss) Per Common Share
Income from continuing operations......... $ 0.72 $ 0.40 $ 0.25
Loss from discontinued operations......... -- (1.41) (0.46)
Cumulative effect of change in accounting
principles............................... (0.03) -- --
---------- ---------- ----------
Net income (loss)......................... $ 0.69 $ (1.01) $ (0.21)
========== ========== ==========
Weighted average number of common shares.. 430,983 426,166 414,186
========== ========== ==========
Diluted Income (Loss) Per Common Share
Income from continuing operations......... $ 0.71 $ 0.40 $ 0.25
Loss from discontinued operations......... -- (1.41) (0.45)
Cumulative effect of change in accounting
principles............................... (0.03) -- --
---------- ---------- ----------
Net income (loss)......................... $ 0.68 $ (1.01) $ (0.20)
========== ========== ==========
Weighted average number of common and
common equivalent shares................. 436,166 427,126 425,281
========== ========== ==========
Dividends Declared Per Common Share....... $ 0.05 $ 0.27 $ 0.35
========== ========== ==========
The accompanying notes are an integral part of these statements.
39
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year
-----------------------------
2001 2000 1999
-------- --------- --------
(In thousands)
Cash Flows From Operating Activities:
Net income (loss).............................. $298,919 $(430,969) $(82,373)
Deduct: loss from discontinued operations...... -- (601,146) (190,760)
-------- --------- --------
Income from continuing operations.............. 298,919 170,177 108,387
Adjustments to reconcile income from continuing
operations to net cash flows from operating
activities:
Cumulative effect of change in accounting
principles, net of tax...................... 12,001 -- --
Noncash derivative loss...................... 5,532 -- --
Noncash restructuring and other charges...... 4,594 46,126 46,374
Depreciation................................. 201,012 192,638 187,455
Amortization................................. 61,496 63,751 58,555
Increase (decrease) from changes in assets and
liabilities:
Accounts receivable.......................... 125,598 143,920 (125,891)
Inventories.................................. (14,144) (83,637) 118,703
Prepaid expenses and other current assets.... (120,019) (9,821) (23,707)
Accounts payable, accrued liabilities and
income taxes payable........................ 137,786 32,211 74,128
Deferred income taxes........................ 54,962 3,383 (7,151)
Other, net................................... (10,944) (3,658) (6,390)
-------- --------- --------
Net cash flows from operating activities of
continuing operations......................... 756,793 555,090 430,463
-------- --------- --------
Cash Flows From Investing Activities:
Purchases of tools, dies and molds............. (93,914) (85,258) (107,017)
Purchases of other property, plant and
equipment..................................... (100,737) (76,491) (94,158)
Payment for businesses acquired................ (20,547) -- (1,091)
Proceeds from sale of other property, plant and
equipment..................................... 6,462 9,938 10,033
Investment in other long-term assets........... -- (877) (48,398)
Other, net..................................... 15,548 1,462 (612)
-------- --------- --------
Net cash flows used for investing activities of
continuing operations......................... (193,188) (151,226) (241,243)
-------- --------- --------
Cash Flows From Financing Activities:
Short-term borrowings, net..................... (175,717) (134,997) 244,595
Proceeds from issuance of long-term debt....... -- 390,710 --
Payments of long-term debt..................... (31,261) (100,000) (30,254)
Exercise of stock options...................... 53,516 25,189 51,207
Purchase of treasury stock..................... -- -- (75,507)
Payment of dividends on common and preferred
stock......................................... (21,602) (153,551) (125,673)
Other, net..................................... -- (1,104) (572)
-------- --------- --------
Net cash flows (used for) from financing
activities of continuing operations........... (175,064) 26,247 63,796
-------- --------- --------
Net Cash Used for Discontinued Operations (See
Note 13)...................................... (542) (444,173) (215,261)
Effect of Exchange Rate Changes on Cash........ (3,784) (903) (2,855)
-------- --------- --------
Increase (Decrease) in Cash and Short-term
Investments................................... 384,215 (14,965) 34,900
Cash and Short-term Investments at Beginning of
Year.......................................... 232,389 247,354 212,454
-------- --------- --------
Cash and Short-term Investments at End of
Year.......................................... $616,604 $ 232,389 $247,354
======== ========= ========
The accompanying notes are an integral part of these statements.
40
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Accumulated Total
Additional Earnings Other Stock-
Preferred Common Paid-In Treasury Deferred (Accumulated Comprehensive holders'
Stock Stock Capital Stock Compensation Deficit) Income (Loss) Equity
--------- -------- ---------- --------- ------------ ------------ ------------- ----------
(In thousands)
Balance, December 31,
1998................... $ 780 $405,114 $1,845,222 $(495,347) $(12,265) $625,197 $(197,898) $2,170,803
Comprehensive (loss):
Net (loss)............. (82,373) (82,373)
Unrealized gain on
securities:
Unrealized holding
gains............... 3,184 3,184
Less:
reclassification
adjustment for
realized gains
included in net
(loss).............. (11,143) (11,143)
Currency translation
adjustments........... (33,790) (33,790)
----- -------- ---------- --------- -------- -------- --------- ----------
Comprehensive (loss).... (82,373) (41,749) (124,122)
Conversion of Series A
Preferred Stock........ (8) 18,000 (17,992) --
Redemption of Series C
Preferred Stock........ (772) 6,382 (51,834) 46,224 --
Purchase of treasury
stock.................. (75,507) (75,507)
Issuance of treasury
stock.................. (87,300) 134,977 47,677
Stock option exercises.. 1,447 13,018 14,465
Tax benefit of stock
option exercises....... 15,000 15,000
Shares issued for
acquisitions........... 241 5,306 5,547
Conversion of
exchangeable shares.... 2,342 (2,342) --
Shares issued under
employee stock purchase
plan................... 37 719 756
Tax adjustment related
to 1987 quasi-
reorganization......... 33,400 33,400
Exercise of warrants.... (24,243) 27,828 3,585
Nonvested stock
activity............... 12,265 12,265
Dividends declared on
common stock........... (137,202) (137,202)
Dividends declared on
preferred stock........ (3,980) (3,980)
----- -------- ---------- --------- -------- -------- --------- ----------
Balance, December 31,
1999................... -- 433,563 1,728,954 (361,825) -- 401,642 (239,647) 1,962,687
Comprehensive (loss):
Net (loss)............. (430,969) (430,969)
Unrealized (loss) on
securities:
Unrealized holding
losses.............. (25,118) (25,118)
Less:
reclassification
adjustment for
realized losses
included in net
(loss).............. 10,995 10,995
Minimum pension
liability
adjustment............ (1,782) (1,782)
Currency translation
adjustments........... (50,485) (50,485)
----- -------- ---------- --------- -------- -------- --------- ----------
Comprehensive (loss).... (430,969) (66,390) (497,359)
41
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-- (continued)
Retained Accumulated Total
Additional Earnings Other Stock-
Preferred Common Paid-In Treasury Deferred (Accumulated Comprehensive holders'
Stock Stock Capital Stock Compensation Deficit) Income (Loss) Equity
--------- -------- ---------- --------- ------------ ------------ ------------- ----------
(In thousands)
Issuance of treasury
stock.................. (48,035) 73,224 25,189
Tax benefit of stock
option exercises....... 2,300 2,300
Tax benefit of prior
year stock option
exercises.............. 19,200 19,200
Compensation cost
related to
stock option
modifications.......... 382 382
Conversion of
exchangeable shares.... 1,976 (1,976) --
Issuance of stock
warrant................ 5,789 5,789
Shares issued for
Learning Company
treasury stock......... 21 (21) --
Dividends declared on
common stock........... (115,090) (115,090)
---- -------- ---------- --------- ---- -------- --------- ----------
Balance, December 31,
2000................... -- 435,560 1,706,614 (288,622) -- (144,417) (306,037) 1,403,098
Comprehensive income:
Net income............. 298,919 298,919
Unrealized holding
losses................ (186) (186)
Transition adjustment
related to FAS 133.... 14,127 14,127
Net gain on derivative
instruments........... 1,412 1,412
Minimum pension
liability adjustment.. (2,518) (2,518)
Currency translation
adjustments........... (14,596) (14,596)
---- -------- ---------- --------- ---- -------- --------- ----------
Comprehensive income.... 298,919 (1,761) 297,158
Issuance of treasury
stock.................. (73,162) 126,678 53,516
Tax benefit of stock
option exercises....... 6,000 6,000
Compensation cost
related to stock option
modifications.......... 288 288
Conversion of
exchangeable shares.... 747 (747) --
Dividends declared on
common stock........... (21,602) (21,602)
---- -------- ---------- --------- ---- -------- --------- ----------
Balance, December 31,
2001................... $-- $436,307 $1,638,993 $(161,944) $-- $132,900 $(307,798) $1,738,458
==== ======== ========== ========= ==== ======== ========= ==========
The accompanying notes are an integral part of these statements.
42
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of Mattel, Inc.
and its subsidiaries ("Mattel"). 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 to 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 Mattel's ability to exercise influence over operating
and financial policies.
Financial data for 1998 and 1999 reflect the retroactive effect of the
merger, accounted for as a pooling of interests, with The Learning Company,
Inc. ("Learning Company") in May 1999. As more fully described in Note 13, the
Consumer Software segment, which was comprised primarily of Learning Company,
was reported as a discontinued operation effective March 31, 2000, and the
consolidated financial statements were reclassified to segregate the net
investment in, and the liabilities and operating results of the Consumer
Software segment.
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated 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 accumulated other comprehensive income (loss) within stockholders'
equity.
Gains and losses from unhedged foreign currency transactions resulting from
receivables and payables that are denominated in a currency other than the
applicable functional currency are recognized in the results of operations in
the period in which the exchange rate changes. For the year ended 2001,
transaction losses included in other expense (income), net totaled
approximately $9 million, while in 2000 and 1999, transaction gains totaled
approximately $3 million and $7 million, respectively.
Cash and Short-Term Investments
Cash includes cash equivalents, which are highly liquid investments with
maturities of three months or less when purchased.
Marketable Securities
Marketable securities are comprised of investments in publicly-traded
securities, classified as available-for-sale, and are recorded at market value
with unrealized gains or losses reported as a component of accumulated other
comprehensive income (loss) within stockholders' equity until realized.
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
43
buildings, 3 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 3 years.
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 2 to 40 years. Substantially all goodwill is
amortized over 20 to 40 years. Accumulated amortization was $383.3 million and
$332.2 million as of December 31, 2001 and 2000, respectively.
The carrying value of fixed and intangible assets is periodically reviewed
to identify and assess any impairment by evaluating the operating performance
and future undiscounted cash flows of the underlying assets.
In July 2001, the Financial Accounting Standards Boards ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, which supercedes Accounting Principles Board Opinion ("APB") No.
16, Business Combinations. This statement requires that all business
combinations be accounted for by the purchase method and establishes specific
criteria for the recognition of intangible assets separately from goodwill. The
statement also requires unallocated negative goodwill to be written off
immediately as an extraordinary gain. The provisions of the statement apply to
business combinations initiated after June 30, 2001. For business combinations
accounted for using the purchase method before July 1, 2001, the provisions of
this statement will be effective in the first quarter of 2002.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supercedes APB Opinion No. 17, Intangible Assets. This statement
addresses the accounting and reporting of goodwill and other intangible assets
subsequent to their acquisition. The statement also provides specific guidance
on testing goodwill and intangible assets for impairment. SFAS No. 142 provides
that (i) goodwill and indefinite-lived intangible assets will no longer be
amortized; (ii) impairment will be measured using various valuation techniques
based on discounted cash flow; (iii) goodwill will be tested for impairment at
least annually at the reporting unit level; (iv) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually; and
(v) intangible assets with finite lives will be amortized over their useful
lives. Goodwill and intangible assets acquired after June 30, 2001 are subject
to the provisions of this statement. All provisions of this statement will
become effective in the first quarter of 2002. Mattel's goodwill amortization
was approximately $46 million of the total $51.1 million in amortization of
intangibles recorded in 2001. Mattel is in the process of evaluating the
potential impact that the adoption of SFAS No. 142 will have on its
consolidated financial position and results of operations. Based on preliminary
results of its valuation study, Mattel anticipates that the total impairment to
be recognized as a result of the transitional goodwill impairment test will be
approximately $400 million pre-tax, relating entirely to the Pleasant Company
reporting unit.
Revenue Recognition
Revenue from the sale of toy products is recognized upon shipment or upon
receipt of products by the customer, depending on customer terms. Accruals for
customer discounts and rebates, and defective returns are recorded as the
related revenues are recognized.
Advertising and Promotion Costs
Costs of media advertising are expensed 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 catalog production and mailing costs that are
generally amortized within three months from the date catalogs are mailed.
Advertising costs associated with customer benefit programs are accrued as the
related revenues are recognized.
44
Emerging Issues Task Force Issue No. 01-09, Accounting for Consideration
Given by a Vendor to a Customer, will be effective in the first quarter of
2002. This issue addresses (i) recognition, measurement, and income statement
classification for sales incentives offered by a vendor without charge to a
customer as a result of a single exchange transaction or as a result of
attaining a specified cumulative level of transactions and (ii) whether certain
consideration from a vendor to a reseller of the vendor's products is an
adjustment to selling prices or cost. The implementation of this issue results
in reclassification of approximately $116 million, $104 million and $93 million
from advertising and promotion expense to sales adjustments for the years ended
2001, 2000 and 1999, respectively, which will reduce net sales by a
corresponding amount. The restatement will also result in a reclassification of
approximately $2 million, $3 million and $22 million from advertising and
promotion expense to cost of sales for the years ended 2001, 2000 and 1999,
respectively.
Research and Development Costs
Research and development costs are charged to expense when incurred.
Stock-Based Compensation
Mattel has adopted the disclosure-only provisions of SFAS 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 Mattel's plans as such options are granted at not less than the
quoted market price of Mattel's common stock on the date of grant.
Income Taxes
Mattel 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 1999 presented in these financial statements
reflect the retroactive effect of the May 1999 Learning Company merger.
Basic income (loss) per common share is computed by dividing earnings
available to common stockholders by the weighted average number of common
shares and common shares obtainable upon the exchange of the exchangeable
shares of Mattel's Canadian subsidiary, Softkey Software Products Inc.,
outstanding during each period. Earnings available to common stockholders
represent reported net income (loss) less preferred stock dividend
requirements.
Diluted income (loss) per common share is computed by dividing diluted
earnings available to common stockholders by the weighted average number of
common shares, common shares obtainable upon the exchange of the exchangeable
shares of Mattel's Canadian subsidiary, Softkey Software Products Inc., and
other common equivalent shares outstanding during each period. The calculation
of common equivalent shares assumes the exercise of dilutive stock options and
warrants, net of assumed treasury share repurchases at average market prices,
and conversion of dilutive preferred stock and convertible debt, as applicable.
Dilutive securities are included in the calculation of weighted average shares
outstanding for those periods in which Mattel recorded income from continuing
operations.
45
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):
2001 2000 1999
---------------- ---------------- -----------------
Earnings Shares Earnings Shares Earnings Shares
-------- ------- -------- ------- -------- -------
Income from continuing
operations................... $310,920 $170,177 $108,387
Less: preferred stock dividend
requirements................. -- -- (3,980)
-------- -------- --------
Earnings available to common
stockholders................. $310,920 430,983 $170,177 426,166 $104,407 414,186
Dilutive securities:
Dilutive stock options...... 4,765 960 3,920
Warrants.................... 418 -- 665
Preferred stock............. -- -- 6,510
-------- ------- -------- ------- -------- -------
Diluted earnings available to
common stockholders.......... $310,920 436,166 $170,177 427,126 $104,407 425,281
======== ======= ======== ======= ======== =======
Premium price stock options totaling 15.2 million and other nonqualified
stock options totaling 13.8 million were excluded from the calculation of
diluted earnings per share in 2001 because they were anti-dilutive. Premium
price stock options totaling 16.3 million and other nonqualified stock options
totaling 25.6 million were excluded from the calculation of diluted earnings
per share in 2000 because they were anti-dilutive. Premium price stock options
totaling 16.9 million, other nonqualified stock options totaling 23.2 million,
convertible debt, and Series C preferred stock were excluded from the
calculation of diluted earnings per share in 1999 because they were anti-
dilutive. Warrants of 3.0 million shares were excluded from the calculation of
diluted earnings per share in 2001, 2000 and 1999 because they were anti-
dilutive.
Derivative Instruments
Mattel uses foreign currency forward exchange and option contracts as cash
flow hedges to hedge its forecasted purchases and sales of inventory
denominated in foreign currencies. Mattel uses fair value hedges to hedge
intercompany loans and management fees and marketable securities denominated in
foreign currencies. Mattel also entered into a cross currency interest rate
swap to convert the interest and principal amounts from Euros to US dollars on
its 200 million Euro Notes due 2002.
At the inception of the contracts, Mattel designates its derivatives as
either cash flow or fair value hedges and documents the relationship of the
hedge to the underlying forecasted transaction, for cash flow hedges, or the
recognized asset or liability, for fair value hedges. Hedge effectiveness is
assessed at inception and throughout the life of the hedge to ensure the hedge
qualifies for hedge accounting treatment. Changes in fair value associated with
hedge ineffectiveness, if any, are recorded in Mattel's results of operations
currently.
Changes in fair value of Mattel's cash flow derivatives are deferred and
recorded as part of accumulated other comprehensive income (loss) in
stockholders' equity until the underlying transaction is settled. Upon
settlement, any gain or loss resulting from the derivative is recorded in
Mattel's results of operations. In the event that an anticipated transaction is
no longer likely to occur, Mattel recognizes the change in fair value of the
derivative in its results of operations currently. Due to the short-term nature
of the contracts involved, Mattel does not use hedge accounting for its fair
value hedges for intercompany loans and management fees. Changes in the fair
value of these derivatives are recorded in Mattel's results of operations
currently.
As a result of adopting SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, Mattel recorded a one-time transition adjustment of
$12.0 million, net of tax, (or $0.03 per share) as the cumulative effect of
change in accounting principles related to unrealized losses on the CyberPatrol
securities that had been previously deferred in accumulated other comprehensive
income (loss). Mattel also recorded a
46
one-time transition adjustment of $2.1 million in accumulated other
comprehensive income (loss) related to unrealized gains on derivative
instruments.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. All provisions of this statement will
be effective at the beginning of fiscal 2003. Mattel is in the process of
determining the impact of this standard on its financial results when
effective.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and amends APB No. 30, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. This statement requires that long-lived assets that
are to be disposed of by sale be measured at the lower of book value or fair
value less costs to sell. SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for (a) recognition and measurement of the impairment of long-
lived assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. This statement also retains APB No. 30's requirement that
companies report discontinued operations separately from continuing operations.
All provisions of this statement will be effective the first quarter of 2002.
The adoption of this statement is not expected to have a significant impact on
Mattel's consolidated financial position and results of operations.
Note 2--Income Taxes
Consolidated income from continuing operations before income taxes consists
of the following (in thousands):
For the Year
------------------------------
2001 2000 1999
--------- --------- ---------
US operations................................... $ 29,431 $(140,747) $(126,675)
Foreign operations.............................. 400,579 366,171 296,839
--------- --------- ---------
$ 430,010 $ 225,424 $ 170,164
========= ========= =========
The provision for current and deferred income taxes consists of the
following (in thousands):
For the Year
-------------------------
2001 2000 1999
-------- ------- -------
Current
Federal............................................ $ 28,748 $ 2,860 $ 9,816
State.............................................. 4,700 3,500 7,400
Foreign............................................ 75,786 52,900 58,150
-------- ------- -------
109,234 59,260 75,366
-------- ------- -------
Deferred
Federal............................................ 787 (9,890) (30,109)
State.............................................. 5,500 (13,400) 3,420
Foreign............................................ 3,569 19,277 13,100
-------- ------- -------
9,856 (4,013) (13,589)
-------- ------- -------
Total provision for income taxes..................... $119,090 $55,247 $61,777
======== ======= =======
47
Deferred income taxes are provided principally for net operating loss
carryforwards, research and development expenses, certain reserves,
depreciation, employee compensation-related expenses, and certain other
expenses that are recognized in different years for financial statement and
income tax purposes. Mattel's deferred income tax assets (liabilities) are
comprised of the following (in thousands):
As of Year End
--------------------
2001 2000
--------- ---------
Operating loss and tax credit carryforwards............... $ 725,709 $ 797,216
Excess of tax basis over book basis....................... 130,077 21,841
Sales allowances and inventory reserves................... 89,834 75,785
Deferred compensation..................................... 43,397 45,371
Restructuring and other charges........................... 11,690 27,210
Postretirement benefits................................... 12,360 12,440
Other..................................................... 30,535 31,640
--------- ---------
Gross deferred income tax assets........................ 1,043,602 1,011,503
--------- ---------
Deferred intangible assets................................ (49,939) (40,374)
Excess of book basis over tax basis....................... (30,249) (3,320)
Retirement benefits....................................... (27,716) (20,872)
Other..................................................... (26,810) (38,637)
--------- ---------
Gross deferred income tax liabilities................... (134,714) (103,203)
Deferred income tax asset valuation allowances............ (374,448) (364,004)
--------- ---------
Net deferred income tax assets............................ $ 534,440 $ 544,296
========= =========
Management considered all available evidence and determined that a valuation
allowance of $374.4 million was required as of December 31, 2001, for certain
tax credit, net operating loss, and capital loss carryforwards that would
likely expire prior to their utilization. Management believes that it is more
likely than not that Mattel will generate sufficient taxable income in the
appropriate carryforward periods to realize the benefit of the remaining net
deferred tax assets of $534.4 million.
Differences between the provision for income taxes for continuing operations
at the US federal statutory income tax rate and the provision in the
consolidated statements of operations are as follows (in thousands):
For the Year
--------------------------
2001 2000 1999
-------- ------- -------
Provision at federal statutory rates............... $150,504 $78,898 $59,557
Increase (decrease) resulting from:
Losses without income tax benefit................ 13,623 12,777 21,170
Foreign earnings taxed at different rates,
including withholding taxes..................... (37,774) (37,167) (62,488)
State and local taxes, net of federal benefit.... 6,630 (6,435) 6,165
Non-deductible amortization and restructuring
charges......................................... 2,092 2,093 25,986
Other............................................ (15,985) 5,081 11,387
-------- ------- -------
Total provision for income taxes................... $119,090 $55,247 $61,777
======== ======= =======
Appropriate US and foreign income taxes have been provided for on earnings
of foreign subsidiary companies that are expected to be remitted in the near
future. The cumulative amount of undistributed earnings of foreign subsidiaries
that Mattel intends to permanently invest and upon which no deferred US income
taxes have been provided is $1.9 billion at December 31, 2001. 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, 2001, Mattel has US net operating loss carryforwards
totaling $889.6 million and credit carryforwards of $139.1 million for federal
income tax purposes. The net operating loss carryforwards
48
expire during the years 2002 to 2020, while $133.8 million of the tax credits
expire during the years 2002 to 2020 with the remainder having no expiration
date. Utilization of these loss and credit carryforwards is subject to annual
limitations, and Mattel has established a valuation allowance for the
carryforwards, which are not expected to be utilized.
Certain foreign subsidiaries have net operating loss carryforwards totaling
$210.2 million ($118.1 million with no expiration date, $78.8 million expiring
during the years 2002 to 2006, and $13.3 million expiring after 2006).
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 2001, 2000 and 1999, nonqualified stock options
exercised resulted in credits to additional paid-in capital totaling $6.0
million, $2.3 million and $15.0 million, respectively.
The Internal Revenue Service has completed its examination of the Mattel,
Inc. federal income tax returns through December 31, 1994 and is currently
examining Mattel's federal income tax returns for fiscal years 1995 through
1997.
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 $23.7 million, $31.6 million, and $18.6 million in 2001, 2000 and 1999,
respectively. Expense for 2000 included $10.8 million for retirement benefits
related to the departure of certain senior executives during the first quarter.
Pension Plans
Mattel 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
Mattel's pension plans, including those of foreign subsidiaries, was not
significant during any year.
The components of net pension income for the Fisher-Price Pension Plan,
based upon a December valuation date for the years ended December 31, 2001,
2000 and 1999, are detailed below (in thousands):
For the Year Ended
-------------------------
2001 2000 1999
------- ------- -------
Service cost........................................ $ 2,897 $ 2,609 $ 2,829
Interest cost....................................... 12,857 12,173 14,655
Expected return on plan assets...................... (22,939) (23,843) (27,237)
Amortization of:
Unrecognized prior service cost................... 108 109 88
Unrecognized net asset............................ -- -- (1,284)
Curtailment gain.................................... (700) -- --
Plan amendment loss................................. 1,944 -- 1,386
------- ------- -------
Net pension income.................................. $(5,833) $(8,952) $(9,563)
======= ======= =======
Reconciliation of the funded status of Fisher-Price's domestic pension plan
to the related prepaid asset included in the consolidated balance sheets is as
follows (in thousands):
As of Year End
---------------
2001 2000
------- -------
Funded status of the plan...................................... $37,699 $58,111
Unrecognized net loss (gain)................................... 22,764 (3,739)
Unrecognized prior service cost................................ 863 1,121
------- -------
Prepaid pension asset.......................................... $61,326 $55,493
======= =======
49
Reconciliation of the assets and liabilities of Fisher-Price's domestic
pension plan are as follows (in thousands):
As of Year End
------------------
2001 2000
-------- --------
Change in Plan Assets
Plan assets at fair value, beginning of year.............. $233,150 $222,793
Actual return on plan assets.............................. 9,631 18,391
Benefits paid............................................. (9,865) (8,034)
-------- --------
Plan assets at fair value, end of year.................... $232,916 $233,150
======== ========
Change in Projected Benefit Obligation
Projected benefit obligation, beginning of year........... $175,039 $157,392
Service cost.............................................. 2,897 2,609
Interest cost............................................. 12,857 12,173
Plan amendments........................................... 1,932 --
Actuarial loss............................................ 12,357 10,899
Benefits paid............................................. (9,865) (8,034)
-------- --------
Projected benefit obligation, end of year................. $195,217 $175,039
======== ========
For the Year
----------------
2001 2000 1999
---- ---- ----
Assumptions:
Weighted average discount rate................................ 7.0% 7.5% 8.0%
Rate of future compensation increases......................... 4.0% 4.0% 4.0%
Long-term rate of return on plan assets....................... 10.0% 11.0% 11.0%
Other Retirement Plans
Domestic employees are eligible to participate in 401(k) savings plans
sponsored by Mattel or its subsidiaries, which are defined contribution plans
satisfying ERISA requirements. Mattel makes company contributions in cash and
allows participants to allocate both individual and company contributions to a
balanced variety of investment funds. Furthermore, Mattel's plan limits a
participant's allocation to the Mattel Stock Fund, which is fully invested in
Mattel common stock, to 50% of the participants account balance. Mattel also
maintains unfunded supplemental executive retirement plans that are
nonqualified defined benefit plans covering certain key executives. For 2001,
2000 and 1999, the accumulated and vested benefit obligations and related
expense of these plans were not significant.
Deferred Compensation and Excess Benefit Plans
Mattel provides a deferred compensation plan that permits certain officers
and key employees to elect to defer portions of their compensation. The
deferred compensation plan, together with certain contributions made by Mattel
and employees to an excess benefit plan, earn various rates of return. The
liability for these plans as of December 31, 2001 and 2000 was $36.8 million
and $69.0 million, respectively. Mattel's contribution to these plans and the
related administrative expense were not significant to the results of
operations during any year.
Mattel has purchased group trust-owned life insurance contracts designed to
assist in funding these programs. The cash surrender value of these policies,
valued at $57.8 million and $56.6 million as of December 31, 2001 and 2000,
respectively, are held in an irrevocable rabbi trust which is included in other
assets in the consolidated balance sheets.
50
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 consolidated
statements of operations are as follows (in thousands):
For the Year
--------------------
2001 2000 1999
------ ------ ------
Service cost.............................................. $ 273 $ 201 $ 224
Interest cost............................................. 2,808 2,886 2,531
Curtailment loss.......................................... 76 -- --
Recognized net actuarial loss............................. 303 202 --
------ ------ ------
Net postretirement benefit cost........................... $3,460 $3,289 $2,755
====== ====== ======
Amounts included in the consolidated balance sheets for this plan are as
follows (in thousands):
As of Year End
----------------
2001 2000
------- -------
Current retirees............................................... $34,758 $31,468
Fully eligible active employees................................ 3,621 3,980
Other active employees......................................... 4,799 4,272
------- -------
Accumulated postretirement benefit obligation................ 43,178 39,720
Unrecognized net actuarial loss................................ (12,974) (9,105)
------- -------
Accrued postretirement benefit liability....................... $30,204 $30,615
======= =======
Reconciliation of the liabilities of Fisher-Price's postretirement health
insurance plan is as follows (in thousands):
As of Year End
----------------
2001 2000
------- -------
Change in Accumulated Postretirement Benefit Obligation
Accumulated postretirement benefit obligation, beginning of
year...................................................... $39,720 $37,163
Service cost............................................... 273 201
Interest cost.............................................. 2,808 2,886
Actuarial loss............................................. 4,248 3,053
Benefits paid, net of participant contributions............ (3,871) (3,583)
------- -------
Accumulated postretirement benefit obligation, end of
year...................................................... $43,178 $39,720
======= =======
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.0% for 2001, 7.5% for 2000 and 8.0% for 1999.
For all participants, the health care cost trend rate for expected claim
costs was assumed to be as follows:
Pre- Post-
Year 65 65
---- ----- -----
2002........................................................... 10.0% 12.0%
2003........................................................... 9.0% 10.5%
2004........................................................... 8.0% 9.0%
2005........................................................... 7.0% 7.5%
2006........................................................... 6.0% 6.0%
2007 and thereafter............................................ 5.5% 5.5%
51
A one percentage point increase/(decrease) in the assumed health care cost
trend rate for each future year would impact the accumulated postretirement
benefit obligation as of December 31, 2001 by $4.7 million and $(4.0) million,
respectively, while a one percentage point increase/(decrease) would impact the
service and interest cost recognized for the year ended December 31, 2001 by
$0.3 million and $(0.3) million, respectively.
Domestic employees of Mattel participate in a contributory postretirement
benefit plan. The ongoing costs and obligations associated with the Mattel,
Inc. plan are not significant to the financial position and results of
operations during any year.
Incentive Awards
Mattel has annual incentive compensation plans for officers and key
employees based on Mattel's performance and subject to certain approvals of the
Compensation/Options Committee of the board of directors. For 2001 and 2000,
$36.2 million and $33.7 million, respectively, were charged to operating
expense for awards under these plans. No expense was recorded in 1999 for
awards under these plans.
In November 2000, the Compensation/Options Committee of the board of
directors approved the Long-Term Incentive Plan covering certain key executives
of Mattel, Inc. for the performance period from August 15, 2000 through
December 31, 2002. Awards are based upon the financial performance of Mattel
during the performance period and are paid in the quarter following the end of
the performance period. For 2001 and 2000, $4.9 million and $8.3 million,
respectively, were charged to operating expense for this plan.
In June 1999, the stockholders approved the Amended and Restated Mattel
Long-Term Incentive Plan. The Compensation/Options Committee of the board of
directors terminated this plan in November 2000, and no expense was recorded
related to this plan.
For 2001 and 2000, $11.1 million and $11.6 million, respectively, was
charged to operating expense for costs related to the recruitment and retention
of senior executives. For 1999, $22.0 million was charged to operating expense
related to a special award. This special broad-based employee award was
approved by Mattel's board of directors and was designed to provide a
competitive compensation level to retain and motivate employees of Mattel.
Note 4--Seasonal Financing and Long-Term Debt
Seasonal Financing
Mattel 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 subsidiaries. The agreement in effect during 2001
consisted of an unsecured committed revolving credit facility providing a total
of $1.0 billion in seasonal financing available for advances and backup for the
issuance of commercial paper (a five-year facility that expires in 2003).
Interest was charged at various rates selected by Mattel, ranging from market
commercial paper rates to the bank reference rate. Within this facility, up to
$300.0 million is available for non-recourse sales of certain trade accounts
receivable of Mattel to the commercial bank group providing the credit line.
Such non-recourse sales are made pursuant to an arrangement whereby certain of
Mattel's subsidiaries sell receivables to Mattel Factoring, Inc., which in turn
sells those receivables to the commercial bank group. Mattel Factoring, Inc. is
a separate special-purpose legal entity with its own assets and liabilities. In
March 2002, Mattel amended and restated this facility into a $1.060 billion, 3-
year facility that expires in 2005 with substantially similar terms and
conditions. Additionally, during 2001, Mattel utilized a 364-day $400.0 million
unsecured committed credit facility with essentially the same terms and
conditions as the $1.0 billion revolving credit facility. Mattel has elected
not to renew this facility when it expires in March 2002 since it believes that
cash on hand at the beginning of 2002 and its $1.060 billion domestic unsecured
committed revolving facility will be sufficient to meet its seasonal working
capital requirements in 2002.
52
Mattel also has a $200.0 million senior unsecured term loan that matures in
July 2003. Interest is charged at various rates, ranging from a LIBOR-based
rate to the bank reference rate (3.66% as of December 31, 2001). The unsecured
credit facilities and term loan require Mattel to meet financial covenants for
consolidated debt-to-capital and interest coverage. Mattel was in compliance
with such covenants during 2001. In addition, Mattel 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 subsidiaries,
Mattel negotiates individual financing arrangements, generally with the same
group of banks that provided credit in the prior year. Foreign credit lines
total approximately $368 million, a portion of which is used to support letters
of credit. Mattel expects to extend these credit lines throughout 2002 and
believes available amounts will be adequate to meet its seasonal financing
requirements. Mattel also enters into agreements with banks of its foreign
subsidiaries for non-recourse sales of certain of its foreign subsidiary
receivables. In fourth quarter 2001, Mattel entered into a securitization
agreement to sell certain receivables of its French and German subsidiaries
with one of its European banks.
Information relating to Mattel's unsecured committed credit facilities,
foreign credit lines and other short-term borrowings is summarized as follows
(in thousands):
For the Year
----------------------------------
2001 2000 1999
---------- ---------- ----------
Balance at end of year
Domestic................................ $ -- $ 178,017 $ 293,744
Foreign................................. 38,108 48,386 75,805
Maximum amount outstanding
Domestic................................ $1,028,090 $1,320,000 $1,207,000
Foreign................................. 64,158 85,905 117,000
Average borrowing
Domestic................................ $ 694,900 $ 835,200 $ 573,100
Foreign................................. 43,168 79,561 40,000
Weighted average interest rate on average
borrowing
Domestic (computed daily)............... 4.6% 6.7% 5.5%
Foreign (computed monthly).............. 17.5% 15.7% 33.0%
Mattel's accounts receivable sold or anticipated, and therefore excluded
from its consolidated balance sheets, is summarized as follows (in millions):
As of Year End
-----------------
2001 2000
------ ------
Domestic factoring and anticipation........................... $261.5 $347.5
Foreign factoring............................................. 237.2 196.9
------ ------
Total factoring and anticipation............................ $498.7 $544.4
====== ======
53
Long-Term Debt
Mattel's long-term debt consists of the following (in thousands):
As of Year End
---------------------------
2001 2000
---------- ----------
Euro notes due 2002................................. $ 177,900 $ 190,710
Unsecured term loan due 2003........................ 200,000 200,000
6% senior notes due 2003............................ 150,000 150,000
6-1/8% senior notes due 2005........................ 150,000 150,000
Medium-term notes................................... 510,000 540,500
10.15% mortgage note due 2005....................... 41,686 42,380
Other............................................... 1,423 1,529
---------- ----------
1,231,009 1,275,119
Less: current portion............................. (210,090) (32,723)
---------- ----------
Total long-term debt............................ $1,020,919 $1,242,396
========== ==========
In 2000, Mattel completed an offering in Europe of Euro 200 million
aggregate principal amount of notes due July 2002. Interest is payable
annually at the rate of Euro 6.625%. Mattel entered into a cross currency
interest rate swap to convert the interest and principal amounts from Euros to
US dollars.
Medium-term notes have maturity dates from 2002 through 2013 and bear
interest at fixed rates from 6.50% to 8.55%.
Mattel repaid its $100.0 million of 6-3/4% senior notes upon maturity in
May 2000. Additionally, Mattel repaid $201.0 million of outstanding 5-1/2%
senior convertible notes ("5-1/2% Notes") upon maturity in November 2000.
Scheduled Maturities
The aggregate amounts of long-term debt maturing in the next five years are
as follows (in thousands):
Senior MT Mortgage
Notes Notes Note Other Total
-------- -------- -------- ------ ----------
2002............................... $177,900 $ 30,000 $ 767 $1,423 $ 210,090
2003............................... 350,000 30,000 849 -- 380,849
2004............................... -- 50,000 939 -- 50,939
2005............................... 150,000 -- 39,131 -- 189,131
2006............................... -- 50,000 -- -- 50,000
Thereafter......................... -- 350,000 -- -- 350,000
-------- -------- ------- ------ ----------
Total............................ $677,900 $510,000 $41,686 $1,423 $1,231,009
======== ======== ======= ====== ==========
Note 5--Stockholders' Equity
Preference Stock and Preference Share Purchase Rights
Mattel is authorized to issue up to 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 Mattel's common
stockholders. The Rights expired on February 17, 2002.
54
Preferred Stock
Mattel is authorized to issue 3.0 million shares of $1.00 par value
preferred stock, of which none is currently outstanding.
Special Voting Preferred Stock and Related Exchangeable Shares
Mattel 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 1.2 times the number of outstanding exchangeable shares of
Softkey Software Products Inc. that are not owned by Mattel, its subsidiaries
or any entity controlled by Mattel. The Special Voting Preferred Stock votes
together with the holders of Mattel's common stock as a single class on all
matters on which the holders of Mattel's common 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 Mattel's Canadian
subsidiary, Softkey Software Products Inc., extends or accelerates the
redemption date.
As of December 31, 2001 and 2000, there were 935.1 thousand and 1.6 million
outstanding exchangeable shares, respectively, that were not owned by Mattel,
its subsidiaries or any entity controlled by Mattel. 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
Mattel's common stock multiplied by 1.2. The redemption price will be paid in
the form of Mattel's common stock, plus cash equal to any unpaid dividends. The
board of directors of 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
Mattel's common stock with respect to each exchangeable share multiplied by
1.2. 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 Mattel's common stock may vote.
During 2001, 2000 and 1999, 622.5 thousand, 1.6 million and 1.9 million
exchangeable shares, respectively, were converted by the holders into common
stock at the rate of 1.2 common shares per exchangeable share.
Series C Mandatorily Convertible Redeemable Preferred Stock ("Series C
Preferred Stock")
In 1999, all 771.9 thousand shares of Series C Preferred Stock outstanding
(and the related depositary shares) were converted by the holders into 7.7
million shares of Mattel common stock pursuant to terms of the certificate of
designations.
Stock Warrants
In 2000, Mattel issued Warner Bros. Consumer Products a stock warrant to
purchase 3.0 million shares of Mattel's common stock at an exercise price of
$10.875 per share. This warrant expires on December 31, 2003. In 1996, Mattel
issued Disney Enterprises, Inc. a warrant to purchase 3.0 million shares of
Mattel's common stock at an exercise price of $27.375 per share. This warrant
expires on October 2, 2002.
The fair value of these warrants is being amortized as a component of
royalty expense when the related properties are introduced over the period the
related revenues are recognized. During 2001, 2000 and 1999, $8.0 million,
$10.4 million and $5.6 million, respectively, was recognized in the results of
operations related to these warrants.
55
In 1999, holders exercised all remaining outstanding stock subscription
warrants assumed in connection with previous mergers resulting in the issuance
of 865.6 thousand common shares.
Common Stock Repurchase Plan
Mattel's common stock repurchase plan, initiated in May 1990, provides for
the repurchase of common shares to fund Mattel'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. No shares were repurchased
in 2001 and 2000 under this plan. During 1999, Mattel repurchased 4.0 million
shares.
Dividends
As part of its financial realignment plan, Mattel announced during the third
quarter of 2000 a change in its dividend policy consisting of a reduction in
the annual cash dividend from $0.36 per share to $0.05 per share. In 2001, a
$0.05 per share dividend was declared by the board of directors in November and
paid in December. During 2000 and 1999, dividends totaling $0.27 per share and
$0.35 per share were declared, respectively. The payment of dividends on common
stock is at the discretion of Mattel's board of directors and is subject to
statutory and customary limitations.
Comprehensive Income (Loss)
The changes in the components of other comprehensive income (loss) are as
follows (in thousands):
For the Year Ended
------------------------------
2001 2000 1999
-------- --------- ---------
Income from continuing operations.............. $310,920 $ 170,177 $ 108,387
Loss from discontinued operations.............. -- (601,146) (190,760)
Cumulative effect of change in accounting
principles.................................... (12,001) -- --
-------- --------- ---------
Net income (loss).............................. 298,919 (430,969) (82,373)
Currency translation adjustments............... (14,596) (50,485) (33,790)
Minimum pension liability adjustments.......... (2,518) (1,782) --
Net unrealized gain on derivative instruments:
Unrealized gains............................. 13,997 -- --
Reclassification adjustment for realized
gains included in net income................ (10,459) -- --
-------- --------- ---------
3,538 -- --
-------- --------- ---------
Net unrealized gains (losses) on securities:
Unrealized holding gains (losses)............ (186) (25,118) 3,184
Reclassification adjustment for realized
(gains) losses included in net income
(loss)...................................... 12,001 10,995 (11,143)
-------- --------- ---------
11,815 (14,123) (7,959)
-------- --------- ---------
Comprehensive income (loss).................... $297,158 $(497,359) $(124,122)
======== ========= =========
The components of accumulated other comprehensive loss are as follows (in
thousands):
As of Year End
--------------------
2001 2000
--------- ---------
Currency translation adjustments......................... $(307,036) $(292,440)
Unrealized holding loss.................................. -- (11,815)
Minimum pension liability adjustment..................... (4,300) (1,782)
Net unrealized gain on derivative instruments............ 3,538 --
--------- ---------
$(307,798) $(306,037)
========= =========
56
Note 6--Stock Compensation Plans
Mattel Stock Option Plans
Under various plans, Mattel has the ability to grant incentive stock
options, nonqualified stock options, stock appreciation rights, nonvested stock
awards, and shares of common stock to officers, key employees, and other
persons providing services to Mattel. In addition, nonqualified stock options
are granted to members of Mattel's board of directors who are not employees of
Mattel. Generally, options are exercisable contingent upon the grantees'
continued employment with Mattel. Nonqualified stock options are granted at not
less than 100% of the fair market value of Mattel's common stock on the date of
grant. Options granted at market price usually expire within ten years from the
date of grant and vest on a schedule determined by the Compensation/Options
Committee of the board of directors, generally over four years. Options granted
at above market price expire five or ten years from the date of grant and vest
based on whether the exercise price is achieved by a specified date. Mattel's
current stock option plans, the 1997, 1996 and 1999 plans, expire on December
31, 2002, 2005 and 2009, respectively. All outstanding awards under plans that
previously expired continue to be exercisable under the terms of their
respective grant agreements. The aggregate number of shares of common stock
available for grant under the 1997, 1996 and 1999 plans cannot exceed 24.0
million, 50.0 million and 12.8 million shares, respectively.
The following is a summary of stock option information and weighted average
exercise prices for Mattel's stock option plans during the year (options in
thousands):
2001 2000 1999
-------------- --------------- --------------
Number Price Number Price Number Price
------ ------ ------- ------ ------ ------
Outstanding at January 1........ 54,313 $25.70 49,152 $30.51 34,736 $36.16
Options granted............... 5,651 15.05 17,900 11.01 21,628 21.91
Options exercised............. (2,650) 12.33 (1,064) 10.79 (201) 20.93
Options canceled.............. (4,841) 30.23 (11,675) 24.40 (7,011) 37.76
------ ------- ------
Outstanding at December 31...... 52,473 $24.82 54,313 $25.70 49,152 $30.51
====== ======= ======
Exercisable at December 31...... 38,958 $27.38 35,017 $29.41 10,813 $23.89
====== ======= ======
Available for grant at December
31............................. 21,775 16,277 16,292
====== ======= ======
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, 2001 (options in
thousands):
Options
Options Outstanding Exercisable
-------------------------------------- -------------------
Exercise Price Ranges Number Remaining Life Price Number Price
- --------------------- ------ -------------- ------ ------ ------
$ 7.52--$ 7.52 7 0.12 $ 7.52 7 $ 7.52
8.41-- 10.38 6,630 7.93 10.37 2,908 10.36
10.50-- 11.88 6,286 8.19 11.46 4,220 11.56
12.00-- 14.86 9,260 8.18 14.29 4,553 13.88
15.00-- 22.50 5,903 5.54 19.40 4,102 18.77
24.00-- 25.75 6,783 4.84 25.31 6,775 25.31
26.13-- 42.00 4,036 5.16 37.62 2,825 37.01
42.31-- 42.31 6,833 1.03 42.31 6,833 42.31
44.87-- 44.87 6,735 1.04 44.87 6,735 44.87
------ ------
$ 7.52--$44.87 52,473 5.34 $24.82 38,958 $27.88
====== ======
57
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 option outstanding 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 acquisitions, all Learning Company stock options vested and
became fully exercisable as a result of the 1999 merger.
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):
2001 2000 1999
-------------- -------------- --------------
Number Price Number Price Number Price
------ ------ ------ ------ ------ ------
Outstanding at January 1......... 2,674 $17.07 10,680 $16.19 17,626 $14.30
Options granted................ -- -- -- -- 1,415 21.12
Options exercised.............. (1,565) 13.33 (1,372) 9.99 (5,278) 10.99
Options canceled............... (984) 24.23 (6,634) 17.13 (3,083) 15.94
------ ------ ------
Outstanding at December 31....... 125 $ 7.56 2,674 $17.07 10,680 $16.19
====== ====== ======
Exercisable at December 31....... 125 $ 7.56 2,674 $17.07 9,473 $15.41
====== ====== ======
Available for grant at December
31.............................. -- -- --
====== ====== ======
The exercise price for Learning Company stock options outstanding as of
December 31, 2001 ranges from $4.54 per share to $16.15 per share, with a
weighted average of $7.56 per share.
Compensation Cost
Mattel 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. 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, Mattel's net income (loss) and earnings per share would have been adjusted
as follows (amounts in millions except per share data):
For the Year Ended
------------------------
2001 2000 1999
------ ------- -------
Net income (loss)
As reported........................................ $298.9 $(431.0) $ (82.4)
Stock option plans................................. (14.9) (34.6) (50.2)
------ ------- -------
Pro forma income (loss).......................... $284.0 $(465.6) $(132.6)
====== ======= =======
Income (loss) per share
Basic
As reported........................................ $ 0.69 $ (1.01) $ (0.21)
Stock option plans................................. (0.03) (0.08) (0.12)
------ ------- -------
Pro forma basic income (loss).................... $ 0.66 $ (1.09) $ (0.33)
====== ======= =======
Diluted
As reported........................................ $ 0.68 $ (1.01) $ (0.20)
Stock option plans................................. (0.03) (0.08) (0.12)
------ ------- -------
Pro forma diluted income (loss).................. $ 0.65 $ (1.09) $ (0.32)
====== ======= =======
58
The pro forma amounts shown above are not indicative of the pro forma effect
in future years since the estimated fair value of options is amortized to
expense over the vesting period, and the number of options granted varies from
year to year.
The fair value of Mattel options granted 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:
2001 2000 1999
----- ----- -----
Options granted at market price
Expected life (in years)................................. 5.50 5.67 3.90
Risk-free interest rate.................................. 4.42% 5.03% 6.34%
Volatility factor........................................ 16.76% 19.55% 18.46%
Dividend yield........................................... 0.86% 0.83% 0.84%
Options granted at above market price
Expected life (in years)................................. -- 10.00 5.00
Risk-free interest rate.................................. -- 6.01% 5.16%
Volatility factor........................................ -- 45.63% 39.90%
Dividend yield........................................... -- 3.40% 0.89%
The weighted average fair value of Mattel options granted at market price
during 2001, 2000 and 1999 were $3.52, $2.96 and $4.85, respectively. The
weighted average fair value of Mattel options granted at above market price
during 2000 and 1999 were $3.18 and $5.43, respectively.
The fair value of Learning Company options granted prior to the 1999 merger
was determined using the Black-Scholes pricing model, assuming an expected life
of four years (using historical exercise patterns), a dividend yield of zero, a
risk-free interest rate of 6.35%, and a volatility factor of 51.0%. The
weighted average fair value of Learning Company options granted prior to the
1999 merger was $9.83.
Nonvested Stock
Mattel awarded 685.5 thousand deferrable nonvested stock units to its chief
executive officer pursuant to the terms of his employment contract. These units
vest at a rate of 25% annually in 2000, 2001 and 2002, with the remaining units
vesting in 2008. The aggregate fair market value of the nonvested stock units
is being amortized to compensation expense over the vesting period. The amount
charged to operating expense related to the vesting of these units was $1.6
million and $4.5 million in 2001 and 2000, respectively.
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. 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 $11.8 million was
charged to results of continuing operations in 1999.
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 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 1999, approximately 37 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.
59
Note 7--Commitments and Contingencies
Leases
Mattel 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,
2001 (in thousands):
Capitalized Operating
Leases Leases
----------- ---------
2002..................................................... $ 300 $ 38,800
2003..................................................... 300 29,800
2004..................................................... 300 26,800
2005..................................................... 300 20,700
2006..................................................... 300 16,200
Thereafter............................................... 8,600 35,800
------- --------
$10,100(a) $168,100
======= ========
(a) Includes $7.9 million of imputed interest.
Rental expense under operating leases amounted to $60.9 million, $60.8
million and $59.9 million for 2001, 2000 and 1999, respectively, net of
sublease income of $0.9 million, $0.7 million and $0.6 million in 2001, 2000
and 1999, respectively.
Commitments
In the normal course of business, Mattel enters into contractual
arrangements to obtain and protect Mattel'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 Mattel's focus on expanding its product lines
through alliances with businesses in other industries.
The largest commitment involves Mattel's agreement with Disney Enterprises,
Inc., which expires in December 2004. This licensing agreement, which contains
annual minimum royalty guarantees, permits Mattel to produce toys based on
classic Disney characters such as Mickey Mouse(R), Winnie the Pooh(R) and the
Disney Princesses, as well as any new infant and preschool toys based on film
and television properties created by Disney.
Licensing and related agreements provide for terms extending from 2002
through 2010 and contain provisions for future minimum payments as shown in the
following table (in thousands):
Minimum
Payments
--------
2002................................................................... $106,000
2003................................................................... 84,000
2004................................................................... 81,000
2005................................................................... 28,000
2006................................................................... 23,000
Thereafter............................................................. 57,000
--------
$379,000
========
60
Royalty expense for 2001, 2000 and 1999 was $220.3 million, $258.8 million
and $219.9 million, respectively.
As of December 31, 2001, Mattel had outstanding commitments for 2002
purchases of inventory of approximately $121 million.
Insurance
Mattel has a wholly-owned insurance subsidiary, Far West Insurance Company,
Ltd. ("Far West"). The purpose of this subsidiary is to insure Mattel's
workers' compensation, general and product liability, and automobile liability
risks. Far West insures the first $0.5 million of the workers' compensation,
general liability and automobile liability risks and the first $1.0 million of
Mattel's product liability risks. Risks in excess of these amounts are
reinsured by various insurance companies that have an "A" or better AM Best
rating. Mattel's liabilities for unpaid and incurred but not reported claims at
December 31, 2001 and 2000 were $22.7 million and $20.5 million, respectively,
and were included in the consolidated balance sheets. Loss reserves are accrued
based upon Mattel's estimates of the aggregate liability for claims incurred
using a study prepared by an outside independent actuary.
Litigation
Litigation Related to Learning Company
Following Mattel's announcement in October 1999 of the expected results of
its Learning Company division for 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, in the joint proxy statement for the merger of Mattel
and Learning Company and elsewhere, that artificially inflated the price of
Mattel's common stock.
In March 2000, these shareholder complaints were consolidated into two lead
cases: Thurber v. Mattel, Inc. et al. (containing claims under (S)10(b) of the
1934 Securities Exchange Act ("Act")) and Dusek v. Mattel, Inc. et al
(containing claims under (S)14(a) of the Act). In January 2001, the Court
granted defendants' motions to dismiss both Thurber and Dusek, and gave
plaintiffs leave to amend. In December 2001, the Court denied defendants'
motions to dismiss the amended complaints in both Thurber and Dusek. In each
case, the plaintiffs have asked for compensatory damages. Both Thurber and
Dusek are currently pending in the United States District Court for the Central
District of California.
Other purported class action litigation has 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. 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
consolidated complaint in In re Broderbund generally alleges that Learning
Company misstated its financial results prior to the time it was acquired by
Mattel. The defendants' motion to dismiss the complaint in In re Broderbund was
granted in May 2001, and the case was dismissed. The In re Broderbund
plaintiffs appealed the dismissal, and the case is currently pending before the
Ninth Circuit Court of Appeals. The plaintiffs have asked for compensatory
damages.
Several stockholders have filed derivative complaints on behalf and for the
benefit of Mattel, alleging, among other things, 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 its approval of severance packages to certain former executives. These
derivative actions have been filed in the Court of Chancery in Delaware, in Los
Angeles Superior Court in California, and in the United States District Court
for the Central
61
District of California, and are all in a preliminary stage. The plaintiffs have
asked for unspecified monetary damages. Plaintiffs filed an amended
consolidated complaint in February 2002 in the California state court actions
and defendants have filed a demurrer seeking dismissal of that action.
Mattel believes that the actions are without merit and intends to defend
them vigorously.
Environmental
Fisher-Price
Fisher-Price has executed a consent order with the State of New York to
implement a groundwater remediation system at one of its former manufacturing
plants. The execution of the consent order was in response to the New York
State Department of Environmental Conservation Record of Decision issued in
March 2000. The Department approved a conceptual work plan in March 2001, with
work scheduled to begin in 2001. However, in response to concerns expressed by
a number of nearby residents, the Department has requested that Mattel postpone
implementation of the groundwater remediation plan until 2002 after the
installation of a public water line to those residents is completed. The
ultimate liability associated with this cleanup presently is estimated to be
approximately $1.76 million, approximately $1.26 million of which has been
incurred through December 31, 2001.
Beaverton, Oregon
Mattel previously operated 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. Mattel immediately closed the water supply and self-reported
the sample results to the Oregon Department of Environmental Quality and the
Oregon Health Division. Mattel also implemented a community outreach program to
employees, former employees and surrounding landowners.
In November 1998, Mattel and another potentially responsible party entered
into a consent order with the Oregon Department of Environmental Quality to
conduct a remedial investigation/feasibility study at the property, to propose
an interim remedial action measure, and to continue the community outreach
program. Mattel has recorded pre-tax charges totaling $19.0 million for
environmental remediation costs related to this property, based on the
completion and approval of the remediation plan and feasibility study.
Approximately $3 million has been incurred through December 31, 2001, largely
related to attorney fees, consulting work and an employee medical screening
program.
General
Mattel is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and labor,
which Mattel is addressing or defending in the ordinary course of business.
Management believes that resolving such matters is not likely to have a
material adverse effect on Mattel's business, financial condition or results of
operations.
Note 8--Financial Instruments
Marketable Securities
Marketable securities totaling $16.3 million were stated at fair value based
on quoted market prices and were classified as securities available-for-sale as
of December 31, 2000. These securities, which had a cost basis of $28.3 million
as of December 31, 2000, were received by Mattel as part of the sale of
CyberPatrol. Upon the adoption of SFAS No. 133 on January 1, 2001, Mattel
recorded a one-time transition adjustment of $12.0 million, net of tax, (or
$0.03 per share) as the cumulative effect of change in accounting principles
related to unrealized losses on these securities that had been previously
deferred in accumulated other comprehensive income (loss).
62
Mattel entered into a derivative transaction designed to limit the impact
of market fluctuations in the fair value of the stock on Mattel's results of
operations. During the first quarter of 2001, Mattel recorded a pre-tax loss
of $5.5 million in other expense, net related to the decrease in fair value of
the derivative. In the second quarter of 2001, these securities were tendered
for debt repayment under the derivative agreement at fair market value, at no
gain or loss to Mattel.
Foreign Exchange Risk Management
Mattel's results of operations and cash flows may be impacted by exchange
rate fluctuations. 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 international borrowings and intercompany
invoicing. Mattel's results of operations can also be affected by the
translation of foreign revenues and earnings into US dollars. Mattel does not
trade in financial instruments for speculative purposes.
Mattel uses foreign currency forward exchange and option contracts as cash
flow hedges, which generally have maturity dates of up to 18 months, to hedge
its forecasted purchases and sales of inventory denominated in foreign
currencies. Changes in fair value of Mattel's cash flow derivatives are
deferred and recorded as part of accumulated other comprehensive income (loss)
in stockholders' equity until the underlying transaction is settled. Upon
settlement, any gain or loss resulting from the derivative is recorded in
Mattel's results of operations. To minimize the risk of counterparty non-
performance, Mattel executes its foreign currency forward exchange and option
contracts with financial institutions believed to be credit-worthy, generally
those that provide Mattel with its working capital lines of credit.
Mattel entered into a cross currency interest rate swap to convert the
interest and principal amounts from Euros to US dollars on its 200 million
Euro Notes due 2002. The debt and related interest payable are marked-to-
market as of each balance sheet date with the change in fair value of the
derivative recorded in accumulated other comprehensive income (loss) within
stockholders' equity until the loan and related interest are paid. The
weighted average interest rate after the swap is 9.0% in US dollars.
Mattel uses fair value hedges to hedge intercompany loans and management
fees denominated in foreign currencies. Due to the short-term nature of the
contracts involved, Mattel does not use hedge accounting for these contracts.
Changes in fair value of these derivatives are recorded in Mattel's results of
operations currently.
As a result of adopting SFAS No. 133, Mattel recorded a one-time transition
adjustment of $2.1 million in comprehensive income (loss) related to
unrealized gains on derivative instruments. During 2001, the ineffectiveness
related to cash flow hedges was not significant. The net gain reclassified
from accumulated other comprehensive income (loss) to Mattel's results of
operations was $10.5 million. As of December 31, 2001, $3.5 million of net
unrealized gains related to derivative instruments have been recorded in
accumulated other comprehensive income (loss). Mattel expects to reclassify
these unrealized gains from accumulated other comprehensive income (loss) to
its results of operations over the life of the contracts, generally 18 months
or less.
As of year end, Mattel held the following foreign exchange risk management
contracts (in thousands):
2001 2000
----------------- -----------------
Notional Exposure Notional Exposure
Amount Hedged Amount Hedged
-------- -------- -------- --------
Foreign exchange forwards.................. $715,175 $715,175 $569,173 $569,173
Cross-currency swaps....................... 190,710 190,710 190,710 190,710
-------- -------- -------- --------
$905,885 $905,885 $759,883 $759,883
======== ======== ======== ========
63
Fair Value of Financial Instruments
Mattel's financial instruments included cash, cash equivalents, marketable
securities, investments, accounts receivable and payable, short-term
borrowings, long-term debt, and foreign currency contracts as of December 31,
2001 and 2000.
The fair values of cash, cash equivalents, accounts receivable and payable,
and short-term borrowings approximated carrying values because of the short-
term nature of these instruments. The estimated fair values of other financial
instruments subject to fair value disclosure, determined based on broker quotes
or rates for the same or similar instruments, and the related carrying amounts
are as follows as of year end (in millions):
2001 2000
----------------- -----------------
Book Fair Book Fair
Value Value Value Value
-------- -------- -------- --------
Long-term debt............................. $1,231.0 $1,206.5 $1,275.1 $1,170.9
Risk management contracts:
Foreign exchange forwards................ 715.2 708.8 569.2 566.6
-------- -------- -------- --------
$1,946.2 $1,915.3 $1,844.3 $1,737.5
======== ======== ======== ========
Credit Concentrations
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. Mattel's three
largest customers accounted for the following percentage of consolidated net
sales and net accounts receivable:
2001 2000 1999
---- ---- ----
Worldwide sales for the year ended............................... 50% 50% 43%
Accounts receivable as of December 31............................ 28% 51% 43%
Note 9--Restructuring and Other Charges
2000 Financial Realignment Plan
During the third quarter of 2000, Mattel initiated a financial realignment
plan designed to improve gross margin; selling and administrative expenses;
operating profit; and cash flow. The plan will require a total pre-tax charge
estimated at $250 million, or $170 million on an after-tax basis, of which
approximately $100 million represents cash expenditures and $70 million
represents non-cash writedowns. Through December 31, 2001, Mattel has recorded
pre-tax charges totaling $175.4 million, or approximately $119 million on an
after-tax basis, related to this plan. Of the total charge, $125.2 million
(approximately $84 million after-taxes) was recorded in 2000 and $50.2 million
(approximately $35 million after-taxes) was recorded in 2001. In accordance
with generally accepted accounting principles, future pre-tax implementation
costs of approximately $75 million have not been accrued as of December 31,
2001. Management expects these costs will be recorded over approximately the
next two years.
The following are the major initiatives included in the financial
realignment plan:
. Reduce excess manufacturing capacity;
. Terminate a variety of licensing and other contractual arrangements that
do not deliver an adequate level of profitability;
. Eiminate product lines that do not meet required levels of
profitability;
64
. Improve supply chain performance and economics;
. Eliminate positions at US-based headquarters locations in El Segundo,
Fisher-Price and Pleasant Company through a combination of layoffs,
elimination of open requisitions, attrition and retirements; and
. Close and consolidate certain international offices.
In April 2001, as part of the financial realignment plan, Mattel announced
the closure of its Murray, Kentucky manufacturing facility (the "North American
Strategy"). Production from this facility will be consolidated into other
Mattel-owned and operated facilities in North America with the final shutdown
of Murray operations occurring in 2002. This action is one of the realignment
measures taken to lower costs. Mattel believes this action was necessary in
order to maintain a competitive cost structure in today's global marketplace.
In 2000, Mattel recorded a $22.9 million pre-tax restructuring charge as
part of the initial phase of the financial realignment plan. This charge,
combined with a $7.0 million adjustment to the 1999 restructuring plan,
resulted in $15.9 million of net pre-tax restructuring and other charges in
2000. The $22.9 million charge related to the elimination of positions at
headquarters locations in El Segundo, Fisher-Price and Pleasant Company,
closure of certain international offices, and consolidation of facilities.
During 2001, Mattel recorded a $15.7 million pre-tax restructuring charge as
part of the financial realignment plan, largely related to the North American
Strategy. Total worldwide headcount reduction as a result of the restructuring
is planned to be approximately 1,700 employees, of which approximately 1,100
are related to the North American Strategy. From inception through December 31,
2001, a total of approximately $19 million has been incurred related to the
termination of nearly 980 employees, of which approximately 640 were terminated
during 2001.
The components of the restructuring charges are as follows (in millions):
Balance Balance
2000 Amounts Dec. 31, 2001 Amounts Dec. 31,
Charges Incurred 2000 Charges Incurred 2001
------- -------- -------- ------- -------- --------
Severance and other
compensation............. $19 $(3) $16 $ 9 $(16) $ 9
Asset writedowns.......... 2 (2) --
Lease termination costs... 1 -- 1 2 (1) 2
Other..................... 1 -- 1 5 (5) 1
--- --- --- --- ---- ---
Total restructuring
charge................. $23 $(5) $18 $16 $(22) $12
=== === === === ==== ===
1999 Restructuring and Other Charges
During 1999, Mattel initiated a restructuring plan for its continuing
operations and incurred certain other nonrecurring charges totaling $281.1
million, approximately $218 million after-tax. The 1999 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. As of December 31, 2000, the restructuring
activities provided for by this charge were complete and substantially all
amounts previously accrued had been paid as of December 31, 2001.
Other charges incurred in 1999 principally related to the 1998 recall of
Mattel's Power Wheels(R) vehicles and environmental remediation costs related
to a former manufacturing facility on a leased property in Beaverton, Oregon.
The liability remaining related to these charges was approximately $22 million
and $24 million at December 31, 2001 and 2000, respectively.
Note 10--Segment Information
The tables below present information about segment revenues, operating
profit and assets. Mattel's reportable segments are separately managed business
units and are divided on a geographic basis between
65
domestic and international. The domestic segment is further divided into US
Girls, US Boys-Entertainment, and US Infant & Preschool. The US Girls segment
includes brands such as Barbie(R), Polly Pocket!(R), Diva Starz(TM), What's Her
Face!(TM) and American Girl(R). The US Boys-Entertainment segment includes Hot
Wheels(R), Matchbox(R), Hot Wheels(R) Electric Racing and Tyco(R) Radio Control
(collectively "Wheels"), and Disney, Nickelodeon(R), Harry Potter(TM), Max
Steel(TM) and games and puzzles (collectively "Entertainment") products. The US
Infant & Preschool segment includes Fisher-Price(R), Disney preschool and
plush, Power Wheels(R), Sesame Street(R) and other preschool products. The
International segment sells products in all toy categories. Segment revenues do
not include sales adjustments such as trade discounts and other allowances.
However, such adjustments are included in the determination of segment income
from operations. Segment income from operations represents income from
continuing operations before interest expense and income taxes, while
consolidated income from operations represents income from continuing
operations 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.
Certain information presented in the tables below has been restated to
conform to the current management structure as of January 2001. Specifically,
the results and assets of Pleasant Company, which had been reported as part of
Other, are now being reported as part of US Girls, which is consistent with
management responsibility for this business. Additionally, Mattel's toy
manufacturing unit is now being managed as a cost center instead of as a profit
center; therefore, toy manufacturing is no longer being reported as a separate
segment. Lastly, certain overhead costs incurred at the headquarters' level in
El Segundo, including facilities, information technology, and other
administration support costs, are now being allocated to the US Girls and US
Boys-Entertainment segments, to more accurately reflect the costs associated
with operating these businesses. These types of overhead costs were already
being reported as part of the US Infant & Preschool and International segments
since these businesses maintain their own headquarters locations.
For the Year
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Revenues
Domestic:
US Girls................................ $1,402,549 $1,457,444 $1,325,273
US Boys-Entertainment................... 768,005 753,149 786,578
US Infant & Preschool................... 1,234,169 1,232,992 1,185,484
Other................................... 8,878 6,484 28,187
---------- ---------- ----------
Total Domestic............................ 3,413,601 3,450,069 3,325,522
International............................. 1,690,513 1,531,590 1,571,149
---------- ---------- ----------
5,104,114 4,981,659 4,896,671
Sales adjustments......................... (300,052) (311,717) (301,181)
---------- ---------- ----------
Net sales from continuing operations...... $4,804,062 $4,669,942 $4,595,490
========== ========== ==========
Operating Profit
Domestic:
US Girls................................ $ 355,319 $ 361,670 $ 331,187
US Boys-Entertainment................... 78,644 56,627 76,773
US Infant & Preschool................... 141,714 139,219 130,409
---------- ---------- ----------
Total Domestic............................ 575,677 557,516 538,369
International............................. 184,351 146,776 182,043
---------- ---------- ----------
760,028 704,292 720,412
Interest expense.......................... (155,132) (152,979) (131,609)
Corporate and other (a)................... (174,886) (325,889) (418,639)
---------- ---------- ----------
Income from continuing operations before
income taxes............................. $ 430,010 $ 225,424 $ 170,164
========== ========== ==========
66
For the Year
--------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Depreciation/Amortization
Domestic:
US Girls.................................... $ 56,003 $ 75,030 $ 65,548
US Boys-Entertainment....................... 37,046 30,189 31,158
US Infant & Preschool....................... 45,206 45,978 44,855
---------- ---------- ----------
Total Domestic................................ 138,255 151,197 141,561
International................................. 60,721 57,278 52,366
---------- ---------- ----------
198,976 208,475 193,927
Corporate and other........................... 63,532 47,914 52,083
---------- ---------- ----------
Depreciation and amortization from continuing
operations................................... $ 262,508 $ 256,389 $ 246,010
========== ========== ==========
As of Year End
--------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Assets
Domestic:
US Girls (b)................................ $ 236,104
US Boys-Entertainment (b)................... 141,992
---------- ---------- ----------
378,096 $ 429,829 $ 536,235
US Infant & Preschool....................... 250,603 254,748 280,237
---------- ---------- ----------
Total Domestic................................ 628,699 684,577 816,472
International................................. 488,352 555,988 556,103
---------- ---------- ----------
1,117,051 1,240,565 1,372,575
Corporate and other........................... 67,026 88,744 65,713
---------- ---------- ----------
Accounts receivable and inventories from
continuing operations........................ $1,184,077 $1,329,309 $1,438,288
========== ========== ==========
(a) For the year ended December 31, 2001, corporate and other includes $50.2
million of charges related to the financial realignment plan (see Note 9)
and a $5.5 million loss on derivative instruments. For the year ended
December 31, 2000, corporate and other includes $125.2 million of charges
related to the financial realignment plan, a $53.1 million charge related
to the departure of certain senior executives, and an $8.4 million charge
related to the losses realized on the disposition of a portion of the stock
received as part of the sale of CyberPatrol, partially offset by a $7.0
million reversal of prior year restructuring charges. For the year ended
December 31, 1999 corporate and other includes $281.1 million related to
the 1999 restructuring plan and other charges (see Note 9).
(b) Asset information was not maintained by individual segment in 1999 and
2000.
Mattel sells a broad variety of toy products, which are grouped into three
major categories: Girls, Boys-Entertainment and Infant & Preschool. The table
below presents worldwide revenues by category:
For the Year
----------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Girls....................................... $2,193,174 $2,130,174 $2,024,258
Boys-Entertainment.......................... 1,269,142 1,195,811 1,200,130
Infant & Preschool.......................... 1,621,292 1,636,278 1,633,855
Other....................................... 20,506 19,396 38,428
---------- ---------- ----------
5,104,114 4,981,659 4,896,671
Sales adjustments........................... (300,052) (311,717) (301,181)
---------- ---------- ----------
Net sales from continuing operations........ $4,804,062 $4,669,942 $4,595,490
========== ========== ==========
67
The tables below present 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.
For the Year
--------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Net Sales
United States.................................. $3,298,845 $3,312,162 $3,194,780
International.................................. 1,505,217 1,357,780 1,400,710
---------- ---------- ----------
Consolidated total............................. $4,804,062 $4,669,942 $4,595,490
========== ========== ==========
As of Year End
--------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Long-Lived Assets
United States.................................. $1,134,991 $1,198,080 $1,242,786
International.................................. 588,247 593,563 673,635
---------- ---------- ----------
1,723,238 1,791,643 1,916,421
Corporate and other............................ 260,038 243,507 257,786
---------- ---------- ----------
Consolidated total............................. $1,983,276 $2,035,150 $2,174,207
========== ========== ==========
Note 11--Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- ---------- ----------
(In thousands, except per share
amounts)
Year Ended December 31, 2001
Net sales............................ $731,948 $854,266 $1,612,767 $1,605,081
Gross profit......................... 327,224 378,909 773,279 787,472
Advertising and promotion expenses... 96,898 103,366 212,885 248,355
Other selling and administrative
expenses............................ 205,319 214,303 230,264 286,192
Restructuring and other charges...... -- 13,000 -- 2,700
Other expense, net................... 6,483 2,737 2,258 5,838
Income (loss) from continuing
operations before income taxes...... (29,230) (6,792) 275,591 190,441
Income (loss) from continuing
operations.......................... (22,038) (4,855) 199,835 137,978
Cumulative effect of change in
accounting principles............... (12,001) -- -- --
Net income (loss) applicable to
common shares....................... (34,039) (4,855) 199,835 137,978
Basic income (loss) per common share:
Income (loss) from continuing
operations........................ $ (0.05) $ (0.01) $ 0.46 $ 0.32
Cumulative effect of change in
accounting principles............. (0.03) -- -- --
Net income (loss).................. $ (0.08) $ (0.01) $ 0.46 $ 0.32
Weighted average number of common
shares............................ 429,936 430,909 431,250 431,813
Diluted income (loss) per common
share:
Income (loss) from continuing
operations........................ $ (0.05) $ (0.01) $ 0.46 $ 0.31
Cumulative effect of change in
accounting principles............. (0.03) -- -- --
Net income (loss).................. $ (0.08) $ (0.01) $ 0.46 $ 0.31
Weighted average number of common
and common equivalent shares ..... 429,936 430,909 436,316 437,505
Dividends declared per common share.. $ -- $ -- $ -- $ 0.05
Common stock market price:
High............................... $ 18.80 $ 18.92 $ 18.97 $ 19.75
Low................................ 13.70 15.44 15.19 15.24
68
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- ---------- ----------
(In thousands, except per share
amounts)
Year Ended December 31, 2000
Net sales.......................... $693,261 $817,797 $1,583,763 $1,575,121
Gross profit....................... 314,357 363,879 666,618 755,931
Advertising and promotion
expenses.......................... 91,287 98,586 225,209 270,795
Other selling and administrative
expenses.......................... 254,199 218,711 224,695 269,393
Restructuring and other charges.... -- (2,000) 17,900 --
Other (income) expense, net........ (6,373) (9,026) 7,656 9,350
Income (loss) from continuing
operations before income taxes ... (61,644) 8,290 135,258 143,520
Income (loss) from continuing
operations........................ (44,630) 6,005 103,694 105,108
Loss from discontinued operations
(a)............................... (126,606) -- (440,560) (33,980)
Net income (loss) applicable to
common shares..................... (171,236) 6,005 (336,866) 71,128
Basic income (loss) per common
share:
Income (loss) from continuing
operations...................... $ (0.10) $ 0.01 $ 0.24 $ 0.25
Loss from discontinued operations
(a)............................. (0.30) -- (1.03) (0.08)
Net income (loss)................ $ (0.40) $ 0.01 $ (0.79) $ 0.17
Weighted average number of common
shares.......................... 425,495 425,818 426,394 426,949
Diluted income (loss) per common
share:
Income (loss) from continuing
operations...................... $ (0.10) $ 0.01 $ 0.24 $ 0.25
Loss from discontinued operations
(a)............................. (0.30) -- (1.03) (0.08)
Net income (loss)................ $ (0.40) $ 0.01 $ (0.79) $ 0.17
Weighted average number of common
and common equivalent shares ... 425,495 427,782 426,945 428,457
Dividends declared per common
share............................. $ 0.09 $ 0.09 $ 0.09 $ --
Common stock market price:
High............................. $ 13.75 $ 15.00 $ 13.81 $ 14.44
Low.............................. 9.06 10.50 9.89 10.81
(a) As more fully described in Note 13 to the Consolidated Financial
Statements, the Consumer Software segment, which was comprised primarily of
Learning Company, was reported as a discontinued operation effective March
31, 2000, and the consolidated financial statements were reclassified to
segregate the net investment in, and the liabilities and operating results
of the Consumer Software segment.
69
Note 12--Supplemental Financial Information
As of Year End
---------------------
2001 2000
---------- ----------
(In thousands)
Inventories include the following:
Raw materials and work in process..................... $ 34,922 $ 34,357
Finished goods........................................ 452,583 455,385
---------- ----------
$ 487,505 $ 489,742
========== ==========
Prepaid expenses and other current assets include the
following:
Prepaid income taxes.................................. $ 97,482 $ 53,608
Receivable collections deposits with banks............ 64,269 --
Other................................................. 130,164 136,191
---------- ----------
$ 291,915 $ 189,799
========== ==========
Intangibles, net include the following:
Goodwill.............................................. $1,089,362 $1,111,106
Other................................................. 20,548 25,751
---------- ----------
$1,109,910 $1,136,857
========== ==========
Other assets include the following:
Deferred income taxes................................. $ 464,689 $ 515,210
Other................................................. 246,644 250,461
---------- ----------
$ 711,333 $ 765,671
========== ==========
Short-term borrowings include the following:
Notes payable......................................... $ 38,108 $ 68,386
Commercial paper...................................... -- 158,017
---------- ----------
$ 38,108 $ 226,403
========== ==========
Accrued liabilities include the following:
Advertising and promotion............................. $ 131,393 $ 142,196
Receivable collections due to banks................... 131,399 --
Royalties............................................. 109,724 137,173
Restructuring and other charges....................... 45,360 64,661
Other................................................. 356,867 359,352
---------- ----------
$ 774,743 $ 703,382
========== ==========
70
For the Year
--------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Selling and administrative expenses include the
following:
Research and development......................... $175,629 $179,525 $171,537
Bad debt expense................................. 57,746 18,280 19,050
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $157,926 $168,591 $134,086
Income taxes..................................... 61,438 44,839 81,345
Noncash investing and financing activities:
Marketable securities tendered for debt
repayment....................................... $ 10,144 $ -- $ --
Liability for Pictionary(R) acquisition.......... 8,419 -- --
Receipt of marketable securities from sale of
business........................................ -- 42,167 --
Issuance of stock warrant........................ -- 5,789 --
Common stock issued for acquisitions:
Settlement of earn-out agreements.............. -- -- 5,547
Note 13--Discontinued Operations
In May 1999, Mattel completed its merger with Learning Company, pursuant to
which Learning Company was merged with and into Mattel, with Mattel being the
surviving corporation. Learning Company had been a leading publisher of
consumer software for home personal computers, including educational,
productivity and entertainment software. Each share of Learning Company Series
A Preferred Stock was converted into 20 shares of Learning Company common stock
immediately prior to the consummation of the merger. Pursuant to the merger
agreement, each outstanding share of Learning Company common stock was then
converted into 1.2 shares of Mattel common stock upon consummation of the
merger. As a result, approximately 126 million Mattel common shares were issued
in exchange for all shares of Learning Company common stock outstanding as of
the merger date. The outstanding share of Learning Company special voting stock
was converted into one share of Mattel Special Voting Preferred Stock. Each
outstanding exchangeable share of Learning Company's Canadian subsidiary,
Softkey Software Products Inc., remained outstanding, but upon consummation of
the merger became exchangeable for 1.2 shares of Mattel common stock. This
transaction was accounted for as a pooling of interests.
On March 31, 2000, Mattel's board of directors resolved to dispose of its
Consumer Software segment, which was comprised primarily of Learning Company.
As a result of this decision, the Consumer Software segment was reported as a
discontinued operation effective March 31, 2000, and the consolidated financial
statements were reclassified to segregate the net investment in, and the
liabilities and operating results of the Consumer Software segment.
On October 18, 2000, Mattel disposed of Learning Company to an affiliate of
Gores Technology Group in return for a contractual right to receive future
consideration based on income generated from its business operations and/or the
net proceeds derived by the new company upon the sale of its assets or other
liquidation events, or 20% of its enterprise value at the end of five years. In
the fourth quarter of 2001, Mattel received proceeds totaling $10.0 million
from Gores Technology Group as a result of liquidation events related to Gores
Technology's sale of the entertainment and education divisions. Mattel also
incurred additional costs of approximately $10 million in 2001 related to the
wind down of the Consumer Software segment. Accordingly, no income was recorded
in the consolidated statement of operations for discontinued operations.
71
Summary financial information for the discontinued operations is as follows
(in millions):
For the Year
----------------
2000 1999
------- -------
Net sales.................................................... $ 337.9 $ 919.5
======= =======
Loss before income taxes..................................... $(179.6) $(280.9)
Benefit for income taxes..................................... (53.0) (90.1)
------- -------
Net loss................................................... (126.6) (190.8)
------- -------
Loss on disposal............................................. (406.8) --
Actual and estimated losses during phase-out period.......... (238.3) --
------- -------
(645.1) --
Benefit for income taxes..................................... (170.6) --
------- -------
Net loss on disposal....................................... (474.5) --
------- -------
Total loss from discontinued operations...................... $(601.1) $(190.8)
======= =======
As of Year End
--------------
2000
--------------
Accounts receivable, net......................................... $33.1
Inventories...................................................... 4.0
Other current assets............................................. 1.8
Other noncurrent assets.......................................... 1.6
Current liabilities.............................................. (29.0)
-----
Net investment in discontinued operations........................ $11.5
=====
Actual losses of the Consumer Software segment from the measurement date of
March 31, 2000 as well as estimated losses through the date of disposal were
recorded as part of the loss from discontinued operations for 2000.
Transaction costs of approximately $24 million related to the disposal of
the Consumer Software segment, primarily consisting of royalty commitments and
severance, have been accrued as of December 31, 2001 and are included in
accrued liabilities in the consolidated balance sheets.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
72
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required under this Item relating to members of Mattel's board
of directors is incorporated by reference herein from its 2002 Notice of Annual
Meeting of Stockholders and Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after December 31, 2001. The information
with respect to the executive officers of Mattel appears under the heading
"Executive Officers of the Registrant" in Part I herein.
Item 11. Executive Compensation
The information required under this Item is incorporated by reference herein
from Mattel's 2002 Notice of Annual Meeting of Stockholders and Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this Item is incorporated by reference herein
from Mattel's 2002 Notice of Annual Meeting of Stockholders and Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001.
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated by reference herein
from Mattel's 2002 Notice of Annual Meeting of Stockholders and Proxy Statement
to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001.
73
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Page
-----
Report of Independent Accountants...................................... 36
Consolidated Balance Sheets as of December 31, 2001 and 2000........... 37-38
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999 .................................................. 39
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999................................................... 40
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999...................................... 41-42
Notes to Consolidated Financial Statements............................. 43-72
2. Financial Statement Schedule for the years ended December 31, 2001, 2000
and 1999(1)
Schedule II--Valuation and Qualifying Accounts and Allowances
3. Exhibits (Listed by numbers corresponding to Item 601 of Regulation S-K)
2.0 Agreement and Plan of Merger, dated as of December 13, 1998, between
Mattel and The Learning Company, Inc. (incorporated by reference to
Exhibit 2.1 of Mattel's Current Report on Form 8-K dated December 15,
1998)
2.1 Sale and Purchase Agreement between Mattel and Alec E. Gores, Trustee of
the Revocable Living Trust Agreement of Alec E. Gores, and GTG/Wizard,
LLC (incorporated by reference to Exhibit 99.1 to Mattel's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000)
2.2 Sale and Purchase Agreement Amendment No. 1 between Mattel and Alec E.
Gores, Trustee of the Revocable Living Trust Agreement of Alec E. Gores,
and GTG/Wizard, LLC (incorporated by reference to Exhibit 2.2 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 2000)
2.3 Amendment No. 2 to the Sale and Purchase Agreement between Mattel and
Alec E. Gores, Trustee of the Revocable Living Trust Agreement of Alec E.
Gores, and GTG/Wizard, LLC (incorporated by reference to Exhibit 2.3 to
Mattel's Annual Report on Form 10-K for the year ended December 31, 2000)
3.0 Restated Certificate of Incorporation of Mattel (File No. 001-05647)
(incorporated by reference to Exhibit 3.0 to Mattel's Annual Report on
Form 10-K for the year ended December 31, 2000)
3.1* Certificate of Amendment of Restated Certificate of Incorporation of
Mattel
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
Mattel (incorporated by reference to Exhibit B to Mattel's Proxy
Statement dated March 30, 1998)
3.3* Amended and Restated By-laws of Mattel
3.4 Certificate of Designations, Preferences, Rights and Limitations of
Special Voting Preferred Stock of Mattel (incorporated by reference to
Exhibit 3.0 to Mattel's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999)
4.0* Specimen Stock Certificate with respect to Mattel's Common Stock
- --------
(1) All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
74
4.1* Indenture dated as of February 15, 1996 between Mattel and Chase
Manhattan Bank and Trust Company, National Association, formerly
Chemical Trust Company of California, as Trustee
4.2 Plan of Arrangement of Softkey Software Products Inc. under Section 182
of the Business Corporations Act (Ontario) (incorporated by reference to
Exhibit 4.4 of Learning Company's Registration Statement on Form S-3,
Registration No. 333-40549)
4.3 Voting and Exchange Trust Agreement, dated as of February 4, 1994 among
Learning Company, Softkey Software Products Inc. and R-M Trust Company,
as Trustee (incorporated by reference to Exhibit 4.3 to Learning
Company's Registration Statement on Form S-3, Registration No. 333-
40549)
4.4 Support Agreement, dated as of February 4, 1994 between Learning Company
and Softkey Software Products Inc. (incorporated by reference to Exhibit
99.4 of Mattel's Form S-4, Registration No. 333-71587)
4.5 Voting and Exchange Trust Supplement dated as of May 12, 1999 between
Mattel, Learning Company, Softkey Software Products Inc. and CIBC Mellon
Trust Company, as Trustee (incorporated by reference to Exhibit 99.3 of
Mattel's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999)
4.6 Support Agreement Amending Agreement dated as of May 12, 1999 between
Mattel, Learning Company and Softkey Software Products Inc.
(incorporated by reference to Exhibit 99.4 of Mattel's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999)
4.7 Warrant to Purchase Shares of Common Stock of Mattel, Inc., dated as of
June 27, 1996 (incorporated by reference to Exhibit 4.6 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 1998)
4.8 Warrant Purchase Agreement dated July 26, 2000 between Mattel and Warner
Bros., a division of Time Warner Entertainment Company, L.P.
(incorporated by reference to Exhibit 99.0 of Mattel's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000)
4.9 Warrant to Purchase 3,000,000, shares of Common Stock of Mattel, Inc.,
dated as of July 26, 2000 (incorporated by reference to Exhibit 4.13 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
2000)
(Mattel has not filed certain long-term debt instruments under which the
principal amount of securities authorized to be issued does not exceed
10% of its total assets. Copies of such agreements will be provided to
the Securities and Exchange Commission upon request.)
10.0* Amended and Restated Credit Agreement dated as of March 20, 2002 among
Mattel, Inc., as Borrower, Bank of America, N.A. as Administrative
Agent, and the financial institutions party thereto.
10.1* First Amended and Restated Receivables Purchase Agreement dated as of
March 20, 2002 among Mattel Factoring, Inc., as Transferor, Mattel,
Inc., as Servicer, Bank of America, N.A., as Administrative Agent, and
the financial institutions party thereto
10.2 Distribution Agreement dated November 12, 1997 among Mattel, Morgan
Stanley & Co. Incorporated and Credit Suisse First Boston Corporation
(incorporated by reference to Exhibit 1.0 to Mattel's Current Report on
Form 8-K dated November 12, 1997)
10.3* Term Loan Agreement dated as of July 17, 2000 among Mattel, the Lenders
(as defined) and The Industrial Bank of Japan, as agent
10.4* First Amendment to Term Loan Agreement dated August 17, 2000 among
Mattel, the Lenders (as defined) and The Industrial Bank of Japan, as
agent
10.5 Second Amendment to Term Loan Agreement among Mattel, the Lenders (as
defined) and The Industrial Bank of Japan, as agent (incorporated by
reference to Exhibit 99.4 to Mattel's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000)
75
10.6* Master Agreement for the Transfer of Receivables dated 30th November,
2001 among Societe Generale Bank Nederland N.V., Mattel International
Holdings B.V. as Depositor and Mattel France S.A. and Mattel GmbH as the
Sellers
10.7* Amendment to Master Agreement for the Transfer of Receivables dated
December 20, 2001 among Societe Generale Bank Nederland N.V., Mattel
International Holdings B.V., Mattel France S.A. and Mattel GmbH.
Executive Compensation Plans and Arrangements of Mattel
10.8 Form of Indemnity Agreement between Mattel and its directors and certain
of its executive officers (incorporated by reference to Exhibit 10.9 to
Mattel's Annual Report on Form 10-K for the year ended December 31, 2000)
10.9 Executive Employment Agreement dated October 18, 2000 between Mattel and
Robert A. Eckert (incorporated by reference to Exhibit 10.10 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 2000)
10.10 Loan Agreement dated May 18, 2000 between Mattel and Robert A. Eckert
(incorporated by reference to Exhibit 99.3 to Mattel's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000)
10.11 Executive Employment Agreement dated January 31, 2000 between Mattel and
Adrienne Fontanella (incorporated by reference to Exhibit 10.6 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
1999)
10.12 Amendment to Employment Agreement dated July 20, 2000 between Mattel and
Adrienne Fontanella (incorporated by reference to Exhibit 10.19 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
2000)
10.13 Loan Agreement dated October 29, 1999 between Mattel and Adrienne
Fontanella (incorporated by reference to Exhibit 10.7 to Mattel's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.14 Loan Agreement dated April 7, 2000 between Mattel and Adrienne
Fontanella (incorporated by reference to Exhibit 99.0 to Mattel's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)
10.15 Amendment to Employment Agreement and Stock Option Grant Agreements
between Mattel and Adrienne Fontanella dated February 10, 2000
(incorporated by reference to Exhibit 10.8 to Mattel's Annual Report on
Form 10-K for the year ended December 31, 1999)
10.16 Executive Employment Agreement dated January 31, 2000 between Mattel and
Matthew C. Bousquette (incorporated by reference to Exhibit 10.9 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
1999)
10.17 Amendment to Employment Agreement dated July 20, 2000 between Mattel and
Matthew C. Bousquette (incorporated by reference to Exhibit 10.24 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
2000)
10.18 Loan Agreement dated October 29, 1999 between Mattel and Matthew C.
Bousquette (incorporated by reference to Exhibit 10.10 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 1999)
10.19 Loan Agreement dated April 7, 2000 between Mattel and Matthew C.
Bousquette (incorporated by reference to Exhibit 99.1 to Mattel's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)
10.20 Amendment to Employment Agreement and Stock Option Grant Agreements
between Mattel and Matthew C. Bousquette dated February 10, 2000
(incorporated by reference to Exhibit 10.11 to Mattel's Annual Report on
Form 10-K for the year ended December 31, 1999)
76
10.21 Executive Employment Agreement dated January 31, 2000 between Mattel
and Neil B. Friedman (incorporated by reference to Exhibit 10.12 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
1999)
10.22 Amendment to Employment Agreement dated November 14, 2000 between
Mattel and Neil B. Friedman (incorporated by reference to Exhibit 10.29
to Mattel's Annual Report on Form 10-K for the year ended December 31,
2000)
10.23 Loan Agreement dated October 29, 1999 between Mattel and Neil B.
Friedman (incorporated by reference to Exhibit 10.13 to Mattel's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.24 Loan Agreement dated April 7, 2000 between Mattel and Neil B. Friedman
(incorporated by reference to Exhibit 99.2 to Mattel's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000)
10.25 Amendment to Employment Agreement and Stock Option Grant Agreements
between Mattel and Neil B. Friedman dated February 10, 2000
(incorporated by reference to Exhibit 10.14 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 1999)
10.26 Amended and Restated Executive Employment Agreement dated March 28,
2000 between Mattel and Kevin M. Farr (incorporated by reference to
Exhibit 10.33 to Mattel's Annual Report on Form 10-K for the year ended
December 31, 2000)
10.27 Amendment to Employment Agreement and Stock Option Grant Agreements
dated July 20, 2000 between Mattel and Kevin M. Farr (incorporated by
reference to Exhibit 10.34 to Mattel's Annual Report on Form 10-K for
the year ended December 31, 2000)
10.28 Loan Agreement dated as of February 3, 2000 between Mattel and Kevin M.
Farr (incorporated by reference to Exhibit 10.35 to Mattel's Annual
Report on Form 10-K for the year ended December 31, 2000)
10.29 Loan Agreement dated as of April 7, 2000 between Mattel and Kevin M.
Farr (incorporated by reference to Exhibit 10.36 to Mattel's Annual
Report on Form 10-K for the year ended December 31, 2000)
10.30* Amendment to Employment Agreement dated March 6, 2002 between Mattel
and Kevin M. Farr
10.31 Mattel, Inc. Management Incentive Plan (incorporated by reference to
Exhibit 10.37 to Mattel's Annual Report on Form 10-K for the year ended
December 31, 2000)
10.32 Amendment No. 1 to Mattel, Inc. Management Incentive Plan (incorporated
by reference to Exhibit 10.16 to Mattel's Annual Report on Form 10-K
for the year ended December 31, 1999)
10.33 Amended and Restated Mattel Long-Term Incentive Plan (incorporated by
reference to Appendix A to Mattel's Proxy Statement dated April 26,
1999)
10.34 Amendment No. 1 to Amended and Restated Mattel Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.19 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 1999)
10.35 Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.12 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 1998)
10.36 Amendment No. 1 to Mattel, Inc. Deferred Compensation Plan for Non-
Employee Directors (incorporated by reference to Exhibit 10.43 to
Mattel's Annual Report on Form 10-K for the year ended December 31,
2000)
10.37* Mattel, Inc. Amended & Restated Supplemental Executive Retirement Plan
as of May 1, 1996
10.38 Amendment No. 1 to Mattel, Inc. Amended & Restated Supplemental
Executive Retirement Plan (incorporated by reference to Exhibit 10.22
to Mattel's Annual Report on Form 10-K for the year ended December 31,
1999)
77
10.39 Mattel, Inc. Deferred Compensation Plan (incorporated by reference to
Exhibit 10.14 to Mattel's Annual Report on Form 10-K for the year ended
December 31, 1998)
10.40 Amendment No. 1 to Mattel, Inc. Deferred Compensation Plan
(incorporated by reference to Exhibit 10.24 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 1999)
10.41* The Fisher-Price, Inc. Pension Plan (1994 Restatement)
10.42 Fifth Amendment to The Fisher-Price Pension Plan (incorporated by
reference to Exhibit 10.49 to Mattel's Annual Report on Form 10-K for
the year ended December 31, 2000)
10.43* Sixth Amendment to The Fisher-Price Pension Plan
10.44 The Fisher-Price Section 415 Excess Benefit Plan (incorporated by
reference to Exhibit 10(n) to Fisher-Price's Registration Statement on
Form 10 dated June 28, 1991)
10.45* Mattel, Inc. Personal Investment Plan, October 1, 2001 Restatement
10.46 Mattel, Inc. PIP Excess Plan (incorporated by reference to Exhibit
10.18 to Mattel's Annual Report on Form 10-K for the year ended
December 31, 1998)
10.47 Amendment No. 1 to Mattel, Inc. PIP Excess Plan (incorporated by
reference to Exhibit 10.29 to Mattel's Annual Report on Form 10-K for
the year ended December 31, 1999)
10.48 Pleasant Company Retirement Savings Plan and Trust Agreement, dated
July 1, 1995 (incorporated by reference to Exhibit 10.19 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 1998)
10.49* Mattel, Inc. Amended and Restated 1990 Stock Option Plan
10.50 Amendment No. 1 to the Mattel, Inc. 1990 Stock Option Plan
(incorporated by reference to the information under the heading
"Amendment to Mattel 1990 Stock Option Plan" on page F-1 of the Joint
Proxy Statement/Prospectus of Mattel and Fisher-Price included in
Mattel's Registration Statement on Form S-4, Registration No. 33-50749)
10.51 Amendment No. 2 to the Mattel, Inc. 1990 Stock Option Plan
(incorporated by reference to Exhibit 10.57 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 2000)
10.52 Amendment No. 3 to the Amended and Restated Mattel, Inc. 1990 Stock
Option Plan (incorporated by reference to Exhibit 10.34 to Mattel's
Annual Report on Form 10-K for the year ended December 31, 1999)
10.53 Amendment No. 4 to the Amended and Restated Mattel, Inc. 1990 Stock
Option Plan (incorporated by reference to Exhibit 99.0 to Mattel's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000)
10.54 Form of First Amendment to Award Agreement (incorporated by reference
to Exhibit 10.60 to Mattel's Annual Report on Form 10-K for the year
ended December 31, 2000)
10.55 Notice of Grant of Stock Options and Grant Agreement (incorporated by
reference to Exhibit 10.61 to Mattel's Annual Report on Form 10-K for
the year ended December 31, 2000)
10.56 Grant Agreement for a Non-Qualified Stock Option (incorporated by
reference to Exhibit 10.62 to Mattel's Annual Report on Form 10-K for
the year ended December 31, 2000)
10.57 Award Cancellation Agreement (incorporated by reference to Exhibit
10.63 to Mattel's Annual Report on Form 10-K for the year ended
December 31, 2000)
10.58* Amended and Restated Mattel, Inc. 1996 Stock Option Plan (the "1996
Plan")
10.59 Amendment to Amended and Restated Mattel, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 4.2 to Mattel's Registration
Statement on Form S-8 dated March 26, 1999)
78
10.60 Amendment No. 2 to Amended and Restated Mattel 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.42 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 1999)
10.61 Amendment No. 3 to Amended and Restated Mattel 1996 Stock Option Plan
(incorporated by reference to Exhibit 99.1 to Mattel's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000)
10.62 Amendment No. 4 to Amended and Restated Mattel 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.68 to Mattel's Annual Report
on Form 10-K for the year ended December 31, 2000)
10.63 Amendment No. 5 to Amended and Restated Mattel 1996 Stock Option Plan
(incorporated by reference to Exhibit 99.1 to Mattel's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001)
10.64* Amendment to Amended and Restated Mattel 1996 Stock Option Plan
10.65 Form of Option Agreement for Outside Directors under the 1996 Plan, as
amended (incorporated by reference to Exhibit 10.43 to Mattel's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.66 Form of Option Agreement under the 1996 Plan, as amended (incorporated
by reference to Exhibit 10.44 to Mattel's Annual Report on Form 10-K
for the year ended December 31, 1999)
10.67 Mattel, Inc. 1997 Premium Price Stock Option Plan (incorporated by
reference to Exhibit A to Mattel's Proxy Statement dated March 30,
1998)
10.68 First Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.0 to Mattel's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998)
10.69 Second Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.26 to Mattel's Annual
report on Form 10-K for the year ended December 31, 1998)
10.70 Amendment No. 3 to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.48 of Mattel's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.71 Amendment No. 4 to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.75 to Mattel's Annual
Report on Form 10-K for the year ended December 31, 2000)
10.72 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997 Premium
Price Stock Option Plan (25% Premium Grant), as amended (incorporated
by reference to Exhibit 10.1 to Mattel's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998)
10.73 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997 Premium
Price Stock Option Plan (33 /1/3/% Premium Grant), as amended
(incorporated by reference to Exhibit 10.2 to Mattel's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998)
10.74 Mattel 1999 Stock Option Plan (incorporated by reference to Exhibit
10.51 to Mattel's Annual Report on Form 10-K for the year ended
December 31, 1999)
10.75 Amendment No. 1 to Mattel 1999 Stock Option Plan (incorporated by
reference to Exhibit 99.2 to Mattel's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000)
10.76 Amendment No. 2 to Mattel 1999 Stock Option Plan (incorporated by
reference to Exhibit 10.80 to Mattel's Annual Report on Form 10-K for
the year ended December 31, 2000)
79
10.77 Form of Option Agreement under the Mattel 1999 Stock Option Plan (Two Year Vesting) (incorporated by
reference to Exhibit 10.52 to Mattel's Annual Report on Form 10-K for the year ended December 31,
1999)
10.78 Form of Option Agreement under the Mattel 1999 Stock Option Plan (Three Year Vesting) (incorporated
by reference to Exhibit 10.53 to Mattel's Annual Report on Form 10-K for the year ended December 31,
1999)
11.0* Computation of Income 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
21.0* Subsidiaries of the Registrant
23.0* Consent of PricewaterhouseCoopers LLP
24.0* Power of Attorney (on page 81 of Form 10-K)
- --------
* Filed herewith
(b) Reports on Form 8-K
Mattel filed no Current Reports on Form 8-K during the quarterly period
ended December 31, 2001.
(c) Exhibits Required by Item 601 of Regulation S-K
See Item (3) above
(d) Financial Statement Schedule
See Item (2) above
Copies of Form 10-K (which includes Exhibit 24.0), Exhibits 11.0, 12.0, 21.0
and 23.0 are available to stockholders of Mattel without charge. Copies of
other Exhibits can be obtained by stockholders of Mattel upon payment of twelve
cents per page for such Exhibits. Written requests should be sent to Secretary,
Mattel, Inc., 333 Continental Boulevard, El Segundo, California 90245-5012.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MATTEL, INC.
Registrant
/s/ Kevin M. Farr
By: _________________________________
Kevin M. Farr
Chief Financial Officer
Date: As of March 28, 2002
POWER OF ATTORNEY
We, the undersigned directors and officers of Mattel, Inc. do hereby
severally constitute and appoint Robert A. Eckert, Robert Normile, Christopher
O'Brien, and John L. Vogelstein, and each of them, our true and lawful
attorneys and agents, to do any and all acts and things in our name and behalf
in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any of them, may deem necessary or advisable to
enable said Corporation to comply with the Securities Exchange Act of 1934, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission, in connection with this Annual Report on Form 10-K,
including specifically, but without limitation, power and authority to sign for
us or any of us, in our names in the capacities indicated below, any and all
amendments hereto; and we do each hereby ratify and confirm all that said
attorneys and agents, or any one of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert A. Eckert Chairman of the Board and March 28, 2002
____________________________________ Chief Executive Officer
Robert A. Eckert
/s/ Kevin M. Farr Chief Financial Officer March 28, 2002
____________________________________ (principal financial and
Kevin M. Farr accounting officer)
/s/ Eugene P. Beard Director March 28, 2002
____________________________________
Eugene P. Beard
/s/ Harold Brown Director March 28, 2002
____________________________________
Harold Brown
/s/ Tully M. Friedman Director March 28, 2002
____________________________________
Tully M. Friedman
/s/ Ronald M. Loeb Director March 28, 2002
____________________________________
Ronald M. Loeb
81
Signature Title Date
--------- ----- ----
/s/ Andrea L. Rich Director March 28, 2002
____________________________________
Andrea L. Rich
/s/ William D. Rollnick Director March 28, 2002
____________________________________
William D. Rollnick
/s/ Christopher A. Sinclair Director March 28, 2002
____________________________________
Christopher A. Sinclair
/s/ G. Craig Sullivan Director March 28, 2002
____________________________________
G. Craig Sullivan
/s/ John L. Vogelstein Director March 28, 2002
____________________________________
John L. Vogelstein
/s/ Kathy B. White Director March 28, 2002
____________________________________
Kathy Brittain White
/s/ Ralph V. Whitworth Director March 28, 2002
____________________________________
Ralph V. Whitworth
82
SCHEDULE II
MATTEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES
(In thousands)
Balance at Additions Balance
Beginning Charged to Net at End
of Year Operations Deductions of Year
---------- ---------- ---------- -------
Allowance for Doubtful Accounts
Year Ended December 31, 2001.. $24,640 $57,746(a) $(26,474)(b) $55,912
Year Ended December 31, 2000.. 29,520 18,280 (23,160)(b) 24,640
Year Ended December 31, 1999.. 40,594 19,050 (30,124)(b) 29,520
Allowance for Inventory
Obsolescence
Year Ended December 31, 2001.. $58,559 $40,813 $(36,256)(c) $63,116
Year Ended December 31, 2000.. 35,327 61,313 (38,081)(c) 58,559
Year Ended December 31, 1999.. 57,322 48,530 (70,525)(c) 35,327
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(a) Increase in bad debt expense charged to operations in 2001 compared to
prior years is due to bankruptcy filings of Kmart and Ames, as well as
exposure with other retailers.
(b) Includes write-offs, recoveries of previous write-offs, and currency
translation adjustments.
(c) Primarily represents relief of previously established reserves resulting
from the disposal of related inventory, raw materials, write-downs and
currency translation adjustments.