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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, 1998.
[_]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 (I.R.S. Employer
of incorporation or organization) Identification No.)
333 Continental Boulevard
El Segundo, California 90245-5012
(Address of principal executive offices)
(310) 252-2000
(Registrant's telephone number)
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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 (and the
associated New York Stock Exchange
Preference Share Purchase Rights) Pacific Exchange, Inc.
Depositary Shares, each representing one
twenty-fifth New York Stock Exchange
of a share of Series C Mandatorily
Convertible
Redeemable Preferred Stock
6 3/4% Senior Notes Due 2000 (None)
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 19, 1999 was $7,029,080,861.
Number of shares outstanding of registrant's common stock, $1.00 par value, as
of March 19, 1999: 286,171,231 shares
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Mattel, Inc. Annual Report to Stockholders for the year
ended December 31, 1998 (Incorporated into Parts I, II and IV).
2. Portions of the Mattel, Inc. 1999 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 designs, manufactures, and markets a broad variety of children's
products on a worldwide basis through both sales to retailers and direct to
consumers. The Company's business is dependent in great part on its ability
each year to redesign, restyle and extend existing core products and product
lines, to design and develop innovative new products and product lines, and to
expand its marketing capability. The Company plans to continue to focus on its
portfolio of brands which have fundamental play patterns and have historically
had worldwide appeal, have been sustainable, and have delivered consistent
profitability. The Company's portfolio of brands can be grouped in the
following four categories:
. Girls--including Barbie(R) fashion dolls and accessories, collector
dolls, software, Fashion Magic(R), American Girl(R), Cabbage Patch
Kids(R), and Polly Pocket(R);
. Infant and Preschool--including Fisher-Price(R), Disney preschool and
plush, Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna
Doodle(R), and View-Master(R);
. Entertainment--including Disney, Nickelodeon(R), games, and puzzles; and
. Wheels--including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing,
and Tyco(R) Radio Control.
Beginning in 1997, the Company began to take a number of important steps
designed to better position the Company for the future. In March 1997, the
Company completed its merger with Tyco Toys, Inc., which at the time was the
third largest toy company in the US. As a result of the merger, the Company
added the Matchbox(R), Tyco(R) Electric Racing, Tyco(R) Radio Control, Sesame
Street(R), Magna Doodle(R), and View-Master(R) brands to its portfolio. The
merger was accounted for as a pooling of interests, which means that for
accounting and financial reporting purposes, the two companies were treated as
if they had always been combined. In connection with the merger, the Company
also commenced a significant integration and restructuring plan, which has
since been substantially completed.
In June 1998, the Company acquired Bluebird Toys PLC, a company organized in
the United Kingdom, from which Mattel previously licensed the product designs
for its Polly Pocket(R) and Disney Tiny Collections brands, as well as the
Polly Pocket(R) trademarks. In July 1998, the Company completed its
acquisition of Pleasant Company, a Wisconsin-based direct marketer of books,
dolls, clothing, accessories and activity products included under the American
Girl(R) brand name.
Most recently, on December 13, 1998, the Company entered into a merger
agreement with The Learning Company, Inc. under which Learning Company will be
merged into the Company, with Mattel remaining as the surviving corporation.
Learning Company develops and publishes a broad range of high quality branded
consumer software for personal computers that educates across every age
category, from young children to adults and is one of the world's largest
consumer software companies. Learning Company's primary emphasis is in
education and productivity software, but it also offers a selection of
lifestyle and, to a lesser extent, entertainment products, both in North
America and internationally. The merger would add the Carmen Sandiego(TM),
Reader Rabbit(R), The Oregon Trail(R), National Geographic(R), American
Greetings(R), The Print Shop(R), Riven(R) and Myst(R) brands to the Company's
portfolio.
The completion of the merger depends on satisfying a number of conditions,
including the approval of the merger agreement by the stockholders of both
companies. It is expected that the merger will be accounted for as a pooling
of interests. The number of shares of Mattel common stock to be issued to
Learning Company's common and preferred stockholders, together with the Mattel
common stock to be issued upon the exchange of the exchangeable shares of
Learning Company's Canadian subsidiary, is expected to represent between
approximately 27% and 30% of Mattel's outstanding voting power after the
merger, depending on the actual exchange ratio at the time of the merger. See
"Risk Factors."
2
As used herein, unless the context requires otherwise, "Mattel" or the
"Company" refers to Mattel, Inc. and its subsidiaries, and "Fisher-Price"
refers to Fisher-Price, Inc., a Delaware corporation and wholly-owned
subsidiary of Mattel.
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.
Competition and Industry Background
Competition in the toy industry is based primarily on price, quality and
play value. In recent years, the toy industry has experienced rapid
consolidation driven, in part, by the desire of industry competitors to offer
a range of products across a broader variety of categories. In the US, the
Company competes with several large toy companies, including Hasbro, Inc., as
well as a number of smaller toy companies. The larger toy companies have
pursued a strategy of focusing on core product lines. Core product lines are
those lines that are expected to be marketed for an extended period of time,
and that historically have provided relatively consistent growth in sales and
profitability. By focusing on core product lines, toy manufacturers have been
able to reduce their reliance on new product introductions and the associated
risk and volatility. The juvenile products market, in which Fisher-Price is
one of the leading companies, is more fragmented.
The toy industry is also experiencing a shift toward greater consolidation
of retail distribution channels, such as large specialty toy stores and
discount retailers, including Toys R Us, Wal-Mart, Kmart and Target, which
have increased their overall share of the retail market. This consolidation
has resulted in an increased reliance among retailers on the large toy
companies because of their financial stability and ability to support products
through advertising and promotion and to distribute products on a national
basis. These retailers' growing acceptance of electronic data interchange has
provided toy manufacturers with an ability to more closely monitor consumers'
acceptance of a particular product or product line and has provided retailers
with the ability to more closely monitor their inventory levels.
Over the last ten years, toy companies based in the US have expanded their
international marketing and manufacturing operations. The Company believes a
strong international distribution system can add significantly to the sales
volume of core product lines and extend the life cycles of newly-developed
products.
Seasonality
Sales of toy products at retail are seasonal, with a majority of retail
sales occurring during the period from September through December.
Consequently, shipments of toy products to retailers are typically greater in
the third and fourth quarters than in each of the first and second quarters
combined. As the large toy retailers become more efficient in their control of
inventory levels, this seasonality increases. See "Risk Factors."
In anticipation of this seasonal increase in retail sales, the Company
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. In addition, the Company and others in the toy industry
develop sales, advertising, promotion and merchandising programs with the
retailers to encourage them to purchase merchandise in periods other than the
peak holiday selling season. These programs, together with 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."
In the fourth quarter of 1998, the Company experienced unanticipated
cutbacks in buying by retailers due to a continuing shift by these retailers
to just-in-time inventory management systems. See "Risk Factors." Under just-
in-time inventory management systems, retailers are timing reorders so that
they are being filled by suppliers closer to the time of purchase by
consumers, rather than maintaining large on-hand inventories to meet consumer
demand. To respond to such shifts, the Company took appropriate actions to
adjust its own shipping to more of a just-in-time pattern. As a result,
products that would have previously been shipped in advance of expected
consumer demand will be shipped closer to the time they are expected to be
purchased by the consumer.
3
Products
The Company has historically achieved consistent sales and earnings growth
by focusing on a number of core brands supplemented by various new product
introductions. The Company's principal core brands are grouped in the
following four categories:
. Girls--including Barbie(R) fashion dolls and accessories, collector
dolls, software, Fashion Magic(R), American Girl(R), Cabbage Patch
Kids(R), and Polly Pocket(R);
. Infant and Preschool--including Fisher-Price(R), Disney preschool and
plush, Power Wheels(R), Sesame Street(R), See 'N Say(R), Magna
Doodle(R), and View-Master(R);
. Entertainment--including Disney, Nickelodeon(R), games, and puzzles; and
. Wheels--including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing,
and Tyco(R) Radio Control.
Core brands are expected to be marketed for an extended period of time and
historically have provided relatively consistent growth in sales and
profitability. In order to provide greater flexibility in the manufacturing
and delivery of products, and as part of a continuing effort to reduce
manufacturing costs, the Company has concentrated production of most of its
core brands in Company-owned facilities and generally uses independent
contractors for the production of non-core products.
With respect to new product introductions, the Company'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. The Company 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 significantly limited the potential loss
associated with new product introductions.
New product introductions for 1998 included:
. Kelly(R) and Tommy(TM) dolls and their battery-operated Power Wheels(R)
vehicle
. Barbie(R) Riding Club and Barbie(R) Nail Designer(TM) CD-ROMS
. Barbie(R) Photo Designer Digital Camera with CD-ROM
. NASCAR(R) Barbie(R) doll
. Hot Wheels(R) Pro-Racing vehicles
. Hot Wheels Collectibles(R) vehicles for the adult collector
. Hot Wheels(R) Stunt Truck Driver(TM) CD-ROM
. Cabbage Patch Kids(R) 15th Anniversary doll, a reproduction of the doll
that started the 1983 craze
. the addition of a series of action figures and playsets based on the
Disney/Pixar movie "A Bug's Life"
. Bounce Around Tigger, battery-operated talking plush with bouncing
feature
. Fisher-Price(R) Prop 'N Carry(TM) infant carrier
. Fisher-Price(R) Rescue Heroes(TM) playset and action figures
. Fisher-Price(R) Shop & Cook(TM) kitchen playcenter
. Tyco(R) R/C Revolver(TM) and Tyco(R) R/C TMH Psycho(TM) radio control
vehicles
. Blue's Clues(TM) plush toys and puzzles based on Nickelodeon's popular
TV show
. Rugrats(TM) line of dolls, plush toys, games and puzzles based on
Nickelodeon's popular TV show and movie
. Reintroduction of the famous 1960 Chatty Cathy(TM) doll with pull-string
talking mechanism
4
New product introductions planned for 1999 include:
. Intel Play(TM) line of PC-enhanced products
. Generation Girl(TM) Barbie(R) and friends that are positioned as trendy
teens with exciting adventures via dolls, books and CD-ROM
. Barbie(R) newborn baby sister Krissy doll
. Working Woman Barbie(R) CD-ROM with print features for letterhead,
business cards, labels and other office-themed activities
. Rosie O'Donnell doll
. Barbie CD-ROM programs for Nintendo Game Boy
. Barbie(R) Frankie Sinatra Gift Set
. Bob Mackie Porcelain Tango Barbie(R)
. Millenium Barbie(R) doll
. Hot Wheels(R) Ferrari products of various categories (Mattel is the
worldwide exclusive licensee)
. Hot Wheels(R) Formula One die cast vehicles
. Hot Wheels Collectibles(R) Jay Leno and Reggie Jackson car sets
. Hot Wheels(R) Crash CD-ROM game
. Hot Wheels(R) NBA vehicles with figures
. Pooh Friendly Place miniature playsets featuring Pooh and friends
. a line of action figures, plush toys, games, puzzles and collector dolls
based on the Disney/Pixar movie "Toy Story 2"
. Chat Pals(TM), a line of plush toys that "come to life" with microphone
and radio frequency technology
. Holiday Chatty Cathy(TM) doll
. Relaunch of Polly Pocket(R) line of dolls and playsets with themes for
the new millennium
. Polly Pocket(R) 3 1/2" doll with fashions
. NBA collectible figures
. Fisher-Price(R) Infant-to-Toddler Soothing Rocker
. Fisher-Price(R) Bounce 'n Play Activity Dome
. Fisher-Price(R) Child Locator
. Fisher-Price(R) 2-in-1 RC Truck(TM)
. Fisher-Price(R) Harley-Davidson(R) Power Wheels(R)
. Fisher-Price(R) Peaceful Planet(TM) line of toys
. Pleasant Company's Amelia(TM), a feisty, funny, make-believe author and
illustrator of Amelia's notebooks along with Amelia(TM) school supplies,
clothing and an interactive CD-ROM
. Bitty Baby(R) line of baby dolls with special outfits accompanied with
Bitty Bear(R) with poseable arms and legs
. History Mysteries(TM), a new line of suspenseful stories featuring 11-12
year old heroines who solve compelling mysteries at important times in
America's past.
5
International Operations
Revenues from the Company's international operations represented
approximately 34% of total consolidated gross sales in 1998. Generally,
products marketed internationally are the same as those marketed domestically,
although some are developed or adapted for particular international markets.
The Company's products are sold directly in most European, Asian and Latin
American countries, and through agents and distributors in those countries
where the Company has no direct presence. See "Licenses and Distribution
Agreements." For a description of a number of the risks associated with the
Company's international operations, see "Risk Factors."
The strength of the US dollar relative to other currencies can significantly
affect the revenues and profitability of the Company's international
operations. From time to time, the Company enters into foreign currency
forward exchange and option contracts primarily as hedges of inventory
purchases, sales and other intercompany transactions denominated in foreign
currencies to limit the effect of exchange rate fluctuations on the results of
operations and cash flows. See "Financial Instruments." For financial
information by geographic area, see Note 8 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
Product Design and Development
Through its product design and development group, the Company regularly
refreshes, redesigns and extends existing product lines and develops
innovative new product lines. The Company's success is dependent on its
ability to continue this activity. See "Risk Factors." Product design and
development are principally conducted by a group of professional designers and
engineers employed by the Company.
License agreements with third parties permit the Company to utilize the
trademark, character, or product of the licensor in its product line. A
principal licensor is The Walt Disney Company, which licenses many of its
characters and entertainment properties for use on the Company's products. The
Company also has entered into license agreements with, among others:
Children's Television Workshop relating to its Sesame Street(R) properties;
Viacom International, Inc. relating to its Nickelodeon(R) properties; NBA
Properties, Inc. for master toy licenses for the NBA, WNBA and USA Basketball;
Ferrari for use of the Ferrari trademark; and Original Appalachian Artworks,
Inc. for Cabbage Patch Kids(R). A number of these licenses relate to product
lines that are significant to the Company's business and operations.
Independent toy designers and developers bring products to the Company and
are generally paid a royalty on the net selling price of products licensed by
the Company. These independent toy designers may also create different
products for other toy companies.
The Company devotes substantial resources to product design and development.
During the years ended December 31, 1998, 1997 and 1996, the Company spent
approximately $178 million, $156 million, and $147 million, respectively, in
connection with the design and development of products, exclusive of royalty
payments. See Note 10 to the Consolidated Financial Statements in the Annual
Report to Stockholders, incorporated herein by reference.
Advertising and Promotion
The Company 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 ads. Promotions include in-
store displays, coupons, merchandising materials and major events focusing on
products and tie-ins with various consumer product companies. To further
promote the Company and its products, the Company sponsors the attractions
"It's A Small World" at Disneyland and Walt Disney World and "Autopia" and
"Storybook Land" at Disneyland Paris under a ten and one-half year agreement
with The Walt Disney Company. The Company also participates in toy stores in
Disneyland, near Disneyland Paris and in the Disney Village Market Place near
Walt Disney World. Separately, a total of twenty-eight BARBIE Boutiques are
located in F.A.O. Schwarz toy stores, including the "BARBIE on Madison"
boutique at the F.A.O. Schwarz flagship store in New York City.
6
In November 1998, the Company opened its first flagship store, American Girl
Place(TM), in Chicago featuring children's products from Pleasant Company.
During the years ended December 31, 1998, 1997 and 1996, Mattel spent
approximately $813 million (17.0% of net sales), $779 million (16.1% of net
sales) and $779 million (17.2% of net sales) respectively, on worldwide
advertising and promotion.
Marketing and Sales
The Company's products are sold throughout the world. In the US, the
Company's products 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. Discount toy stores
continue to increase their market share. During the year ended December 31,
1998, Wal-Mart and Toys R Us accounted for approximately 16.5% and 15.3%,
respectively, of worldwide consolidated net sales and were the only customers
accounting for 10% or more of consolidated net sales. See "Risk Factors."
The Company has also been focusing increasingly on direct-to-consumer sales,
through both its direct-to-consumer catalogue business and by taking advantage
of e-commerce over the Internet. During 1998, the Company introduced websites
that support its numerous core products. Consumers can purchase many of the
Company's products over the Internet, including Barbie(R) collector dolls,
Mattel Media(R) software products, and Hot Wheels(R) and Matchbox(R)
collectibles. The Company believes that increasing its focus on direct-to-
consumer sales will help to maximize sales of its products and create a better
balance between direct-to-consumer sales and sales to traditional retailers.
During 1998, the Company acquired Pleasant Company, a Wisconsin-based direct
marketer of products under the American Girl(R) brand name. The Company also
expects to be able to use the infrastructure provided by Learning Company to
take many of Mattel's brands directly to the consumer.
In general, the Company's major domestic and international customers review
its product lines and product concepts for the upcoming year at showings
beginning in late summer. The Company also participates in domestic and
international toy industry trade fairs in the first quarter of the year. In
the fourth quarter of 1998, the Company experienced unanticipated cutbacks in
buying by retailers due to a continuing shift by these retailers to just-in-
time inventory management systems. Under just-in-time inventory management
systems, retailers are timing reorders so that they are being filled by
suppliers closer to the time of purchase by consumers, rather than maintaining
large on-hand inventories to meet consumer demand. To respond to such shifts,
the Company took appropriate actions to adjust its own shipping to more of a
just-in-time pattern. As a result, products that would have previously been
shipped in advance of expected consumer demand will be shipped closer to the
time they are expected to be purchased by the consumer. Historically, the
greater proportion of shipments of products to retailers occurs during the
third and fourth quarters of the year. See "Seasonality" and "Risk Factors."
Through its marketing research departments, the Company conducts basic
consumer research and product testing and monitors demographic factors and
trends. This information assists the Company in evaluating consumer acceptance
of products, including whether there is increasing or decreasing demand for
its products.
The Company bases its production schedules on customer orders, modified by
historical trends, results of market research and current market information.
The actual shipments of products ordered and the order cancellation rate are
affected by consumer acceptance of the product line, the strength of competing
products, marketing strategies of retailers and overall economic conditions.
Unexpected changes in these factors can result in a lack of product
availability or excess inventory in a particular product line.
Manufacturing
The Company's products are manufactured in Company-owned facilities and by
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
7
reduce manufacturing costs, the Company has concentrated production of most of
its core products in the Company's facilities and generally uses independent
contractors for the production of non-core products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Manufacturing Risk" in the Annual Report to Stockholders, incorporated herein
by reference.
Mattel's manufacturing facilities are located in the states of Kentucky,
Georgia, and Oregon, and in Mexico, China, Indonesia, Malaysia, Thailand and
Italy. The Company 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, the
Company produces many of its key products in more than one facility.
All foreign countries in which the Company's products are manufactured
(principally China, Indonesia, Malaysia and Mexico) currently enjoy "normal
trade relations" ("NTR") status under US tariff laws, which provides a
favorable category of US import duties. As a result of continuing concerns in
the US Congress regarding China's human rights policies, and disputes
regarding Chinese trade policies, including the country's inadequate
protection of US intellectual property rights, there has been, and may be in
the future, opposition to the extension of NTR status for China.
The loss of NTR status for China would result in a substantial increase in
the import duty for toys manufactured in China and imported into the US and
would result in increased costs for the Company and others in the toy
industry. See "Risk Factors." The impact of such an event on the Company could
be somewhat mitigated by the Company's ability to source product for the US
market from countries other than China and ship products manufactured in China
to markets outside the US. As a result, the Company has expanded its
production capacity in other countries. Other factors, including the Company's
ability to pass along the added costs through price increases and the pricing
policies of vendors in China, could also mitigate the impact of a loss of
China's NTR status.
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
began implementing Uruguay Round tariff reductions that, by 1999, will lower
the tariffs on dolls by over 40% in the European Union and by 15% in Japan.
The European Union and Japan are fully eliminating tariffs on several other
toy categories over a period of ten years.
Commitments
In the normal course of business, the Company enters into contractual
arrangements for future purchases of goods and services to ensure availability
and timely delivery, and to obtain and protect the Company's right to create
and market certain products. 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 the
Company's focus on expanding its product lines through alliances with
businesses in other industries, such as television and motion picture
entertainment companies.
As of December 31, 1998, the Company had outstanding commitments for 1999
purchases of inventory of approximately $60 million. Licensing and similar
agreements with terms extending through the year 2003 contain provisions for
future guaranteed minimum payments aggregating approximately $371 million. In
addition, under a certain licensing agreement, the Company may have additional
commitments of up to $37.8 million in the year 2000 payable over three years.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Commitments" and Note 6 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
8
Licenses and Distribution Agreements
License agreements with third parties permit the Company to utilize the
trademark, character or product of the licensor in its product line. The
Company's level of licensing activity has expanded in recent years. Royalty
expense during the years ended December 31, 1998, 1997 and 1996 was
approximately $201 million, $194 million and $155 million, respectively. See
"Product Design and Development" and Note 6 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
The Company distributes finished products that are independently designed
and manufactured. The Company also licenses a number of its trademarks,
characters and other property rights to others for use in connection with the
sale of non-toy and other products that do not compete with the Company's
products.
Financial Instruments
To limit the impact associated with the exposure to currency exchange rate
fluctuations, the Company enters into foreign currency forward exchange and
option contracts primarily to hedge its purchase of inventory, sales and other
intercompany transactions denominated in foreign currencies. These contracts
are intended to fix a portion of the Company's product cost and intercompany
cash flows, and thereby limit the effect of foreign currency fluctuations on
the Company's results of operations and cash flows. The Company does not trade
in financial instruments for speculative purposes.
For additional information regarding foreign currency contracts, see
"International Operations" above and Note 6 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
Seasonal Financing
The Company's financing of seasonal working capital 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 Company sales programs, and when inventories are at their highest
in anticipation of expected second half sales volume. See "Seasonality." The
Company expects to finance its seasonal working capital requirements for the
coming year by using existing and internally generated cash, issuing
commercial paper, selling certain trade receivables and using various short-
term bank lines of credit. In addition, the Company avails itself of
individual short-term foreign credit lines with a number of banks, which will
be used as needed to finance seasonal working capital requirements of certain
foreign affiliates.
The Company maintains and periodically amends or replaces an unsecured
committed revolving credit agreement with a commercial bank group that is used
as the primary source of financing the seasonal working capital requirements
of its domestic and certain foreign affiliates. The agreement in effect during
1998 consisted of a committed unsecured facility providing a total of $1.0
billion in seasonal financing. Within the facility, up to $700.0 million was a
standard revolving credit line available for advances and backup for
commercial paper issuances (a five-year facility that expires in 2003).
Interest was charged at various rates selected by the Company, ranging from
market commercial paper rates to the bank reference rate. The remaining $300.0
million (a five-year facility that expires in 2003) was available for
nonrecourse purchases of certain trade accounts receivable of the Company by
the commercial bank group providing the credit line. The agreement required
the Company to comply with certain financial covenants for consolidated debt-
to-capital and interest coverage, and the Company was in compliance with such
covenants during 1998. This agreement will continue to be in effect during
1999. In addition, the Company avails itself of uncommitted domestic
facilities provided by certain banks to issue short-term money market loans.
The Company believes the amounts available under its committed revolving
credit facility, its uncommitted money market facility and its foreign credit
lines will be adequate to meet its seasonal financing requirements.
9
Raw Materials
Virtually all of the Company's raw materials are available from numerous
suppliers. Pricing is relatively low and stable due to excess capacities
resulting from the Asian business crises.
The Company believes that, as large companies that sell various materials
continue to consolidate, less efficient plants will be closed reducing
availability. However, this should have little impact on the Company in 1999.
Trademarks, Copyrights, and Patents
Most of the Company'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 the Company in
that they provide product recognition and acceptance worldwide.
The Company 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 the Company's
business and operations. The Company 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. See "Risk Factors."
The Company also licenses a number of its trademarks, characters and other
property rights to others for use in connection with the sale of non-toy and
other products that do not compete with the Company's products.
Government Regulations
The Company's products are subject to the provisions of the Consumer Product
Safety Act, the Federal Hazardous Substances Act and the Flammable Fabrics
Act, and the regulations promulgated thereunder. 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, and articles that contain excessive amounts of a
banned hazardous substance. The Flammable Fabrics Act enables the Consumer
Product Safety Commission to regulate and enforce flammability standards for
fabrics used in consumer products. The Consumer Product Safety Commission may
also require the repurchase by the manufacturer of articles that are banned.
Similar laws exist in some states and cities and in various international
markets. See "Item 3. Legal Proceedings"
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.
The Company maintains a quality control program to ensure product safety
compliance with the various federal, state and international requirements.
The Company is subject to various other federal, state and local laws and
regulations applicable to its business. The Company believes that it is in
substantial compliance with these laws and regulations.
Effects of Inflation
Inflation rates in the US and in major foreign countries where the Company
does business have not had a significant impact on its results of operations
or financial condition during the three years ended December 31, 1998. The US
Consumer Price Index increased 1.6% in 1998, 1.7% in 1997 and 3.3% in 1996.
The Company
10
receives some protection from the impact of inflation from high turnover of
inventories and its ability to pass on higher prices to customers.
Employees
The total number of persons employed by the Company and its subsidiaries at
any one time varies because of the seasonal nature of its manufacturing
operations. At December 31, 1998, the Company's total number of employees,
including its international operations, was approximately 29,000. Headcount at
December 31, 1998 increased over the amount reported at year-end 1997 due the
addition of employees of acquired companies and employees at our new
manufacturing facilities in Thailand, Indonesia and Mexico.
Risk Factors
This Risk Factors section is written to be responsive to the Security and
Exchange Commission's recently enacted "Plain English" guidelines. In this
section the words "we", "our", "ours" and "us" refer only to Mattel, Inc. and
its subsidiaries and not any other person.
We may not realize the expected benefits from the merger with Learning
Company, such as cost savings, operating efficiencies, revenue enhancements
and other synergies, due to difficulties integrating Mattel and Learning
Company.
We entered into the merger agreement with Learning Company with the
expectation that the merger will result in a number of benefits, including
cost savings, operating efficiencies, revenue enhancements and other
synergies. Integrating the operations and personnel of Mattel and Learning
Company will be a complex process, and we cannot assure you that the
integration will be completed rapidly or will result in the realization of the
anticipated benefits of the merger. The successful integration of the two
companies will require, among other things, integration of their sales and
marketing groups and coordination of their research and development efforts.
The diversion of the attention of our management and any difficulties
encountered in the process of combining the companies could cause the
disruption of, or a loss of momentum in, the activities of our business.
Further, the process of combining the companies could negatively affect
employee morale and our ability to retain some key employees after the merger.
In addition, the announcement and completion of the merger could cause
customers to delay or change orders for Learning Company's products as a
result of uncertainty over the integration of its software products. The
inability to successfully integrate the operations and personnel of the
companies, or any significant delay in achieving integration, could have a
material adverse effect on our business, financial condition and results of
operations after the merger.
As a result of the merger, we will incur transaction costs that may exceed our
estimates and significant consolidation and integration expenses that we
cannot accurately estimate at this time.
We estimate that, as a result of the merger, Mattel and Learning Company
will incur aggregate transaction costs of approximately $75 million to $85
million, including investment banking, legal and accounting fees, and
contractual incentive benefits. In addition, we expect that we will incur
significant consolidation and integration expenses which we cannot accurately
estimate at this time. We expect to charge the majority of such costs and
expenses to operations in fiscal 1999. The amount of the transaction costs is
a preliminary estimate and is subject to change. Actual transaction costs may
substantially exceed our estimates and, when combined with the expenses
incurred in connection with the consolidation and integration of the
companies, could have an adverse effect on our financial condition and results
of operations.
Many of our significant customers have shifted to just-in-time inventory
management systems, which may limit our ability to accurately forecast
reorders of our products by retailers and reduce or delay sales of our
products.
Many of our significant customers have recently shifted to "just-in-time"
inventory management systems to track sales of particular products. Such
customers are timing reorders so that they are being filled by suppliers
11
closer to the time of purchase by consumers, rather than maintaining large on-
hand inventories to meet consumer demand. While these systems reduce a
retailer's investment in inventory, they increase pressure on suppliers like
us to fill orders promptly and shift a significant portion of inventory risk
and carrying costs to the supplier. These systems may also limit our ability
to accurately forecast reorders and create potential volatility in our
operating results. The limited inventory carried by retailers may also reduce
or delay retail sales. This in turn could impair our ability to obtain
reorders of our products in quantities necessary to permit us to achieve
planned sales and income growth. In addition, we may be required to incur
substantial additional expenses to fill late reorders in order to ensure that
our products are available at retail locations prior to the peak holiday
buying season. The failure of anticipated reorders to materialize could have a
material adverse effect on our business, financial condition and results of
operations. The recent shift to just-in-time inventory management by one of
our largest customers, Toys R Us, Inc., resulted in an approximately $250
million decrease in our net sales in 1998 as compared to 1997. Because many of
our customers have only recently shifted to just-in-time inventory management
systems, the full impact of this shift is uncertain. It is not clear if more
of our customers will shift to just-in-time inventory management systems or
the extent to which those retailers that have shifted will ultimately reduce
their overall inventories of our products.
The toy business is seasonal and therefore our annual operating results will
depend, in large part, on our sales during the relatively brief holiday
season.
Sales of toy products at retail are seasonal, with a majority of retail
sales occurring during the period from September through December. This
seasonality is increasing as large toy retailers become more efficient in
their control of inventory levels through the just-in-time inventory
management systems described in the preceding paragraph. As a result, our
annual operating results will depend, in large part, on our sales during the
relatively brief holiday season. This seasonal pattern requires significant
use of working capital mainly to manufacture inventory during the year, prior
to the holiday season, and requires accurate forecasting of demand for
products during the holiday season. Failure to accurately predict and respond
to consumer demand may have a material adverse effect on our business,
financial condition and results of operations.
Our business is dependent on our two largest customers, which together
accounted for approximately 31.8% of Mattel's net sales in fiscal 1998.
A small number of our customers account for a large share of our net sales.
For the year ended December 31, 1998, Wal-Mart Stores, Inc. accounted for
approximately 16.5% of our net sales, Toys R Us, Inc. accounted for
approximately 15.3% of net sales, and our ten largest customers in the
aggregate accounted for approximately 52.9% of net sales. If some of these
customers were to cease doing business with us, or to significantly reduce the
amount of their purchases from us, it could have a material adverse effect on
our business, financial condition and results of operations.
Consumer preferences are difficult to predict and the introduction of new
products is critical in the toy industry.
Our business and operating results depend largely upon the appeal of our
products. Our continued success in the toy industry will depend on our ability
to redesign, restyle and extend our existing core products and product lines
and to develop, introduce and gain customer acceptance of new products and
product lines. However, consumer preferences in the toy industry are
continuously changing and are difficult to predict. Individual products
typically have short life cycles. There can be no assurance that:
. any of our current toy products or product lines will continue to be
popular for any significant period of time;
. any new products and product lines introduced by us will achieve an
adequate degree of market acceptance; or
. any new products' life cycles will be sufficient to permit us to recover
development, manufacturing, marketing and other costs of the products.
12
A decline in the popularity of our existing toy products and product lines or
the failure of new toy products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have a material
adverse effect on our business, financial condition and results of operations.
Our sales and manufacturing operations outside the US subject us to risks
normally associated with international operations.
For the year ended December 31, 1998, our international gross sales
comprised approximately 34% of our total consolidated gross sales. We expect
our international sales to continue to account for a significant and growing
portion of our revenues. Additionally, we own and operate manufacturing
facilities and utilize third-party manufacturers principally in China,
Indonesia, Malaysia and Mexico. Such sales and manufacturing operations are
subject to the risks normally associated with international operations,
including:
. currency conversion risks and currency fluctuations;
. limitations, including taxes, on the repatriation of earnings;
. political instability, civil unrest and economic instability;
. greater difficulty enforcing intellectual property rights and weaker
laws protecting such rights;
. greater difficulty and expense in conducting business abroad;
. complications in complying with foreign laws and changes in governmental
policies;
. transportation delays and interruptions; and
. the imposition of tariffs.
These risks could negatively impact our international sales and manufacturing
operations, which could have a material adverse effect on our business,
financial condition and results of operations.
All foreign countries in which our products are manufactured currently enjoy
"normal trade relations" status under US tariff laws, which provides a
favorable category of US import duties. As a result of continuing concerns in
the US Congress regarding China's human rights policies, and disputes
regarding Chinese trade policies, including the country's inadequate
protection of US intellectual property rights, there has been, and may be in
the future, opposition to the extension of "normal trade relations" status for
China. The loss of "normal trade relations" status for China would result in a
substantial increase in the import duty of toys manufactured in China and
imported into the US and would result in increased costs. Such increases in
import duties and costs could have a material adverse effect on our business,
financial condition and results of operations.
We are dependent on our intellectual property rights and we cannot assure you
that we will be able to successfully protect such rights.
We rely on a combination of trade secret, copyright, trademark, patent and
other proprietary rights laws to protect our rights to valuable intellectual
property related to our core brands. We also rely on license and other
agreements to establish ownership rights and to maintain confidentiality. We
cannot assure you that such intellectual property rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.
Technological developments and the Internet may create new risks to our
ability to protect our intellectual property. In addition, laws of certain
foreign countries in which our products may be sold do not protect
intellectual property rights to the same extent as the laws of the US. The
failure to protect our proprietary information and any successful intellectual
property challenges or infringement proceedings against us could have a
material adverse effect on our business, financial condition and results of
operations.
13
Executive Officers of the Registrant
The current executive officers of the Company, all of whom 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
---- --- -------- ---------
Jill E. Barad............... 47 Chairman of the Board and 1984
Chief Executive Officer
Pleasant T. Rowland......... 58 Vice Chairman of the Board and 1998
President, Pleasant Company
Astrid Autolitano........... 60 President, Mattel 1996
International
Matthew C. Bousquette....... 40 President, Boys/Entertainment 1999
Adrienne Fontanella......... 40 President, Girls/Barbie 1999
Neil B. Friedman............ 51 President, Fisher-Price brands 1999
Joseph C. Gandolfo.......... 56 President, Worldwide 1990
Manufacturing Operations and
a Director of Mattel, Inc.
David Haddad................ 36 President, Mattel Media 1999
Ned Mansour................. 50 President, Corporate 1992
Operations, General Counsel
and a Director of Mattel,
Inc.
Harry J. Pearce............. 54 Chief Financial Officer 1997
Francesca Luzuriaga......... 44 Executive Vice President, 1995
Worldwide Business Planning
and Resources
Kevin M. Farr............... 41 Senior Vice President and 1996
Corporate Controller
William Stavro.............. 59 Senior Vice President and 1993
Treasurer
Ms. Barad has been Chairman of the Board and Chief Executive Officer since
October 1997 and a member of the Board of Directors since November 1991. From
January 1997 to October 1997, she was President and Chief Executive Officer.
From August 1992 until December 1996, she was President and Chief Operating
Officer. From December 1989 until August 1992, she was President, Mattel USA.
Prior to that she served in various executive positions in the Marketing,
Product Design and Product Development areas.
Ms. Rowland has been Vice Chairman of the Board and President, Pleasant
Company since July 1998. Ms. Rowland has been President of Pleasant Company
since 1986 when she founded that company.
Ms. Autolitano has been President, Mattel International since September
1996. From August 1995 to September 1996, she served as Executive Vice
President-Latin America and Mexico. From December 1989 to August 1995, she
served as Senior Vice President-Latin America and Mexico.
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. He joined Mattel in
December 1993, as Senior Vice President-Marketing for Activity Toys, and had
previously worked for the Company from 1984 to 1988 in Boys Toys marketing.
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 New Licensing
Venture. 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.
14
Mr. Friedman has been President, Fisher-Price brands since March 1999. From
August 1996 to March 1999, he was President-Tyco Preschool. For more than five
years prior to that time, he was President of MCA/Universal Merchandising and
President of Aviva/Hasbro.
Mr. Gandolfo has been President, Worldwide Manufacturing Operations since
April 1990 and a member of the Board of Directors since May 1997.
Mr. Haddad has been President, Mattel Media since March 1999. From August
1997 to March 1999, he served as General Manager-Mattel Media and Senior Vice-
President-Barbie Collectibles. From July 1991 to August 1997, he was with The
Walt Disney Company, where he held a number of positions within the publishing
unit.
Mr. Mansour has been President, Corporate Operations and a member of the
Board of Directors since August 1996. He has been General Counsel since
November 1997. From April 1991, he served in several senior managerial
positions at Mattel, including President, Mattel-USA, Chief Administrative
Officer and Secretary.
Mr. Pearce has been Chief Financial Officer since May 1997. From 1973 to May
1997, he served as Chief Financial Officer of Tyco Toys, Inc. In 1993, he was
also named Vice Chairman of Tyco Toys, Inc.
Ms. Luzuriaga has been Executive Vice President, Worldwide Business Planning
and Resources since May 1997. From December 1995 to May 1997, she served as
Executive Vice President and Chief Financial Officer. From March 1989 to
December 1995, she served in several senior managerial positions at Mattel,
including Controller, Treasurer and Executive Vice President Finance.
Mr. Farr has been Senior Vice President and Corporate Controller since
September 1996. 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.
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.
Item 2. Properties
The Company owns its corporate headquarters in El Segundo, California,
consisting of 335,000 square feet, which is subject to a $45.0 million
mortgage, and an adjacent 55,000 square foot office building. The Company also
leases buildings in El Segundo consisting of approximately 250,000 square
feet, which are primarily used for its design and development and audio visual
departments. Fisher-Price owns its headquarters facilities in East Aurora, New
York, consisting of approximately 390,000 square feet. Pleasant Company owns
its headquarters facilities in Middleton, Wisconsin, consisting of
approximately 395,000 square feet.
The Company maintains sales offices in California, Illinois, New York, North
Carolina and Texas, and warehouse and distribution facilities in California,
Georgia, Indiana, Kentucky and Texas. The Company owns a computer facility in
Phoenix, Arizona. Internationally, the Company has its principal offices
and/or warehouse space in Australia, Canada, France, Hong Kong, Italy, Mexico,
The Netherlands, and the United Kingdom. The Company's principal manufacturing
facilities are located in China, Indonesia, Italy, Malaysia, Mexico, Thailand
and the US. See "Manufacturing."
Most of the Company's facilities are occupied under leases and, for the most
part, are fully utilized, although excess manufacturing capacity exists from
time to time based on product mix and demand. With respect to leases that are
scheduled to expire during the next twelve months, the Company may negotiate
new lease agreements, renew leases or utilize alternative facilities. See Note
6 to the Consolidated Financial Statements in the Annual Report to
Stockholders, incorporated herein by reference.
15
Item 3. Legal Proceedings
Power Wheels(R) Recall and Related Matters
On October 22, 1998, the Company announced that Fisher-Price, in cooperation
with the Consumer Product Safety Commission, would conduct a voluntary recall
involving up to 10 million battery-powered Power Wheels(R) ride-on vehicles.
The recall did not result from any serious injury, and involves the
replacement of electronic components that may overheat, particularly when
consumers make alterations to the product. The recall involves vehicles sold
nationwide since 1984 under nearly 100 model names.
As a result of the voluntary recall, in September 1998, the Company
recognized a $38.0 million pre-tax ($27.2 million after-tax) charge. The
Company believes the amount reserved will be sufficient to cover all costs
associated with the recall.
Greenwald Litigation and Related Matters
On October 13, 1995, Michelle Greenwald filed a complaint (Case No. YC 025
008) against the Company in Superior Court of the State of California, County
of Los Angeles. Ms. Greenwald is a former employee whom the Company terminated
in July 1995. Her complaint sought $50 million in general and special damages,
plus punitive damages, for breach of oral, written and implied contract,
wrongful termination in violation of public policy and violation of California
Labor Code Section 970. Ms. Greenwald claimed that her termination resulted
from complaints she made to management concerning general allegations that the
Company did not account properly for sales and certain costs associated with
sales and more specific allegations that the Company failed to account
properly for certain royalty obligations to The Walt Disney Company. On
December 5, 1996, the Company's motion for summary adjudication of Ms.
Greenwald's public policy claim was granted. On March 7, 1997, the Company
filed a motion for summary judgment on the remaining causes of action. On
December 9, 1997, the Company's motion for summary judgment of Ms. Greenwald's
remaining claims was granted. On February 4, 1998, Ms. Greenwald filed a
notice of appeal. Ms. Greenwald's opening brief on appeal is due on March 23,
1999. The Company intends to defend the action vigorously, including her
appeal.
Toys R Us and Related Matters
On September 25, 1997, an administrative law judge of the Federal Trade
Commission issued his initial decision in the matter In re Toys R Us, Inc.
(FTC Docket No. 9278). The administrative law judge made findings of fact and
conclusions of law that the toy retailer Toys R Us, Inc. had violated federal
antitrust laws and entered into vertical and horizontal arrangements with
various toy manufacturers, including Mattel, whereby the manufacturers would
refuse to do business with warehouse clubs, or would do business with
warehouse clubs only on terms acceptable to Toys R Us. On October 13, 1998,
the Federal Trade Commission issued an opinion and a final order affirming the
findings and conclusions of the administrative law judge. Toys R Us has now
filed a notice of appeal in the United States Court of Appeals for the Seventh
Circuit.
Following the announcement of the administrative law judge's decision, the
Company was named as a defendant, along with certain other toy manufacturers,
in a number of antitrust actions in various states related to the Toys R Us
matter. On October 2, 1997, the Attorney General of the State of New York
filed in the United States District Court, Eastern District of New York (Case
No. CV 97 5714), an action against Toys R Us and certain toy manufacturers,
including the Company, seeking treble damages, expenses and attorneys' fees,
on behalf of all natural persons in the State of New York who purchased toy
products from retailers from 1989 to the present. The complaint alleges that
Toys R Us orchestrated an illegal conspiracy with various toy manufacturers,
including the Company, to cut off supplies of popular toys to warehouse clubs
and low margin retailers that compete with Toys R Us. The attorneys general
from forty-three other states, the District of Columbia and the Commonwealth
of Puerto Rico joined this action on or about November 17, 1997.
Following the filing of the New York action, a series of private treble
damage class actions under the federal antitrust laws have been filed in
various federal district courts. The Company is aware of a total of twenty-
seven
16
actions which are currently pending and name Mattel as a defendant: fourteen
actions in the United States District Court, District of New Jersey; five
actions in the United States District Court, Northern District of California;
one action in the United States District Court, District of Illinois; one
action in the United States District Court, District of Maryland; one action
in the United States District Court, District of Vermont; and five actions in
the United States District Court, Eastern District of New York. While the
allegations and relief sought are substantially the same as those in the New
York action, the defendants differ from action to action, as does the alleged
conspiracy period. On January 23, 1998, at a hearing before the Judicial Panel
on Multidistrict Litigation, the parties agreed to have these related actions
transferred to the Eastern District of New York before the Honorable Nina
Gershon. A transfer order was issued by the Judicial Panel on Multidistrict
Litigation on February 11, 1998.
Since May 1998, Mattel has participated in settlement negotiations conducted
with the aid of the Honorable Charles B. Renfrew, a former United States
District Judge. Judge Renfrew was appointed to serve as a mediator in Wilson
v. Toys R Us, No. CV 96-574 (Tuscaloosa County, Alabama). His appointment has
been broadened by agreement to include all of the parens patriae state actions
described above, and all of the named class plaintiffs actions, including
state actions in California and Alabama, and each of the defendants. The
Company has entered into an agreement in principle to settle each of the
actions subject to mediation before Judge Renfrew, and is awaiting the
submission of a Final Settlement Agreement and Release for execution. The
settlement agreement will require a preliminary approval by the United States
District Court, Eastern District of New York, as transferee court in what has
been designated as MDL 1211, In re Toys R Us Antitrust Litigation, and will be
subject to final court approval pending class notice.
The Company is also aware of four class action complaints filed in state
court in California naming Toys R Us as a defendant and the Company and
various other toy manufacturers as nondefendant co-conspirators. These actions
have been coordinated in Superior Court of the State of California, County of
Alameda, and allege violations of state antitrust laws, seek unspecified
damages and are based on substantially similar allegations to those in the
Federal Trade Commission administrative proceeding. On February 2, 1999, the
Company was added as a party defendant pursuant to a Second Amended and
Restated Class Action Complaint filed in the Circuit Court for Tuscaloosa
County, Alabama. The allegations are substantially similar to those contained
in the above-described state class action complaints, and those of the Federal
Trade Commission administrative proceeding. It is anticipated that this action
will be disposed of as part of the settlement agreement that will result from
the mediation proceeding before Judge Renfrew.
Pursuant to the mediation proceeding before Judge Renfrew, all proceedings,
including those in state court, have been stayed pursuant to stipulation and
order. It is anticipated that a settlement agreement disposing of all of the
above discussed matters will be executed within 60-90 days, subject to court
approval. Until such time as these matters are concluded by the entry of
appropriate court orders, the Company intends to vigorously defend the
litigation in which it is named involving Toys R Us.
In connection with the proposed settlement agreement, the Company recognized
a $6.0 million pre-tax charge in the fourth quarter of 1998. The proposed
settlement agreement calls for the Company to make cash and toy contributions
prior to November 1999.
Environmental
Fisher-Price. Fisher-Price has executed a consent order with the State of
New York involving a remedial action/feasibility study for voluntary cleanup
of contamination at one of its manufacturing plants. The ultimate liability
associated with this cleanup presently is estimated to be less than
$1,425,000, approximately $1,010,500 of which has been incurred through
December 31, 1998.
Beaverton, Oregon. The Company operates a manufacturing facility on a leased
property in Beaverton, Oregon that was acquired as part of the Tyco merger. In
March 1998, samples of groundwater used by the facility for process water and
drinking water disclosed elevated levels of certain chemicals, including
trichloroethylene
17
("TCE"). The Company immediately closed the water supply and self-reported the
sample results to the Oregon Department of Environmental Quality ("DEQ") and
Oregon Health Division. The Company also implemented an employee communication
and medical screening program.
In November 1998, the Company and another potentially responsible party
entered into a consent order with the DEQ to conduct a remedial
investigation/feasibility study at the facility, to propose an interim
remedial action measure and to continue the community outreach program to
employees, former employees and surrounding landowners. It is not presently
possible to estimate the cost to the Company related to the DEQ's
investigation and any subsequent orders for future work.
Litigation Related to Pending Business Combination
On December 16, 21, and 23, 1998, several stockholders of Learning Company
filed six separate purported class action complaints in the Court of Chancery
of the State of Delaware in and for New Castle County against Learning Company
and Learning Company's board of directors for alleged breaches of fiduciary
duties in connection with the proposed merger. The six complaints have since
been consolidated. The consolidated complaint seeks the certification as a
class of all Learning Company stockholders, an injunction against the merger,
rescission if the merger is consummated, damages, costs and disbursements,
including attorneys' fees. The consolidated complaint alleges that Learning
Company's board of directors breached their fiduciary duties to Learning
Company's stockholders by, among other things, failing to conduct due
diligence sufficient to have discovered material, adverse information
concerning Mattel's anticipated operational and financial results and agreeing
to an exchange ratio that failed to protect Learning Company stockholders
against a decline in the value of Mattel common stock. The consolidated
complaint names Mattel as an additional defendant, claiming that Mattel aided
and abetted the alleged breaches of fiduciary duty. Mattel will aggressively
defend itself against the action and will continue to pursue the merger.
General
The Company is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and
labor, which the Company is addressing or defending in the ordinary course of
business. Management believes that any liability which may potentially result
upon resolution of such matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
For information regarding the markets in which the Company's common stock,
par value $1.00 per share, is traded, see the cover page hereof, and for
information regarding the high and low closing prices of the common stock for
the last two calendar years, see Note 9 to the Consolidated Financial
Statements in the Annual Report to Stockholders, incorporated herein by
reference.
As of March 19, 1999, the Company had approximately 48,000 holders of record
of its common stock.
The Company paid dividends on its common stock of $0.06 per share in January
1997, $0.07 per share in April, July and October 1997 and January 1998 and
$0.08 per share in April, July and October 1998. The payment of dividends on
common stock is at the discretion of the Company's board of directors and is
subject to customary limitations.
Item 6. Selected Financial Data
The information under the caption "Five-Year Financial Summary" on page 25
in the Annual Report to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 26 through 32 in the
Annual Report to Stockholders is incorporated herein by reference.
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Foreign Currency Risk" on pages
30 and 31 in the Annual Report to Stockholders and Note 6 to the Consolidated
Financial Statements in the Annual Report to Stockholders are incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of Mattel, Inc. and its subsidiaries,
together with the report of PricewaterhouseCoopers LLP dated February 1, 1999,
included on pages 33 through 52 in the Annual Report to Stockholders are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
19
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required under this Item relating to members of the Company's
board of directors is incorporated by reference herein from its 1999 Notice of
Annual Meeting of Stockholders and Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998.
The information with respect to the executive officers of the Company 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 the Company's 1999 Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after December 31, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this Item is incorporated by reference herein
from the Company's 1999 Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after December 31, 1998.
Item 13. Certain Relationships and Related Transactions
The information required under this Item is incorporated by reference herein
from the Company's 1999 Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after December 31, 1998.
20
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Annual Report
Page Number(1)
--------------
(1) Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.. 33
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................. 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................. 35
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996....................... 36
Notes to Consolidated Financial Statements.................... 37-51
Report of PricewaterhouseCoopers LLP, Independent Accountants
to the Company............................................... 52
- --------
(1) Incorporated by reference from the indicated pages of the Annual Report to
Stockholders for the year ended December 31, 1998. With the exception of
the information incorporated by reference in Items 1, 5, 6, 7, 8 and 14 of
this report, the Annual Report to Stockholders is not deemed filed as part
of this report.
21
Independent Auditors' Report
----------------------------
To the Board of Directors and Stockholders
Tyco Toys, Inc.
Mount Laurel, New Jersey
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Tyco Toys, Inc. and subsidiaries for the year ended
December 31, 1996, not separately presented herein. Those financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on those financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Tyco Toys, Inc.
and subsidiaries for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 4, 1997 except for note 15,
as to which the date is March 27, 1997
22
(2) Financial Statement Schedule for the years ended December 31, 1998, 1997
and 1996(1)
Report of Independent Accountants on Financial Statement Schedule
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
the Company and The Learning Company, Inc. (incorporated by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
December 15, 1998)
2.1 Stock Option Agreement, dated as of December 13, 1998, between the
Company and The Learning Company, Inc. (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K, dated
December 15, 1998)
3.0 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.0 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993)
3.1 Certificate of Amendment of Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit B to the Company's
Proxy Statement dated March 23, 1996)
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit B to the Company's
Proxy Statement dated March 30, 1998)
3.3 By-laws of the Company, as amended to date (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form S-3
dated September 26, 1997)
4.0 Rights Agreement, dated as of February 7, 1992, between the Company
and The First National Bank of Boston, as Rights Agent (incorporated
by reference to Exhibit 1 to the Company's Registration Statement on
Form 8-A, dated February 12, 1992)
4.1 Specimen Stock Certificate with respect to the Company's Common Stock
(incorporated by reference to the Company's Report on Form 8-A, dated
February 28, 1996)
4.2 Certificate of Designation of Series C Preferred Stock dated March 26,
1997 (incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-3 dated August 21, 1997)
4.3 Deposit Agreement dated June 24, 1996 among Tyco Toys, Inc., Midlantic
Bank, N.A., as Depositary, and all holders from time to time of
depositary receipts issued thereunder (incorporated by reference to
Exhibit 4.2 to Tyco Toys, Inc.'s Registration Statement on Form S-3
dated June 20, 1996)
4.4 Amendment to Deposit Agreement dated as of March 27, 1997 between the
Company, as
successor to Tyco and The First National Bank of Boston (incorporated
by reference to Exhibit 4.9 to the Company's Registration Statement
on Form S-3 dated September 26, 1997)
4.5 Indenture dated as of February 15, 1996 between the Company and
Chemical Trust Company of California, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated April 11, 1996)
4.6* Warrant to Purchase Shares of Common Stock of Mattel, Inc., dated as
of June 27, 1996
4.7* Stock Subscription Warrant dated as of June 28, 1991 between Fisher-
Price, Inc. and certain investors (incorporated by reference to
Exhibit 4(c) to Fisher-Price's Report on Form 10-K for the transition
period from July 1, 1991 to December 29, 1991)
(The Company 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.)
(1) All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
23
10.0 Second Amended and Restated Credit Agreement dated as of March 11,
1998 among the Company, the Banks named therein and Bank of America
National Trust and Savings Association, as Agent (incorporated by
reference to Exhibit 99.0 to the Company's Current Report on Form
8-K dated August 21, 1998)
10.1 Receivables Purchase Agreement dated as of March 11, 1998 among the
Company, Mattel Factoring, Inc., the Banks named therein and
NationsBank of Texas, N.A., as Agent (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K dated
August 21, 1998)
10.2 Distribution Agreement dated November 12, 1997 among the Company,
Morgan Stanley & Co. Incorporated and Credit Suisse First Boston
Corporation (incorporated by reference to Exhibit 1.0 to the
Company's Current Report on Form 8-K dated November 12, 1997)
Executive Compensation Plans and Arrangements of the Company
10.3 Form of Indemnity Agreement between Mattel and its directors and
certain of its executive officers (incorporated by reference to
Exhibit B to Notice of Annual Meeting of Stockholders of the
Company dated March 24, 1987)
10.4 Amended and Restated Employment Agreement dated January 1, 1997
between the Company and Jill E. Barad (incorporated by reference to
Exhibit 10.0 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)
10.5 Employment Agreement dated May 5, 1997 between the Company and Gary
S. Baughman (incorporated by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated August 21, 1998)
10.6 Amended and Restated Employment Agreement dated September 9, 1996
between the Company and Joseph C. Gandolfo (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996)
10.7 Amended and Restated Employment Agreement dated July 29, 1996
between the Company and Ned Mansour (incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.8* Amended and Restated Employment Agreement dated April 14, 1997
between the Company and Harry J. Pearce
10.9 Employment Agreement dated December 20, 1996 between the Company and
Bruce L. Stein (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996)
10.10 Mattel, Inc. Management Incentive Plan (incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.11 Mattel, Inc. Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995)
10.12* Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors
10.13 Mattel, Inc. Amended & Restated Supplemental Executive Retirement
Plan as of May 1, 1996 (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996)
10.14* Mattel, Inc. Deferred Compensation Plan
10.15 The Fisher-Price, Inc. Pension Plan (1989 Restatement) (incorporated
by reference to Exhibit 10(l) to Fisher-Price's Registration
Statement on Form 10 dated June 28, 1991)
24
10.16 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)
10.17 Mattel, Inc. Personal Investment Plan, April 1, 1997 Restatement
(incorporated by reference to Exhibit 99.3 to the Company's Current
Report on Form 8-K dated August 21, 1998)
10.18* Mattel, Inc. PIP Excess Plan
10.19* Pleasant Company Retirement Savings Plan and Trust Agreement, dated
July 1, 1995
10.20 Amended and Restated Mattel, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
10.21 Amendment to Amended and Restated Mattel, Inc. 1996 Stock Option
Plan (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-8 dated March 26, 1999)
10.22 Form of Option Agreement for Outside Directors under the 1996 Stock
Option Plan (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10.23* Form of Option Agreement under the 1996 Stock Option Plan
10.24 Mattel, Inc. 1997 Premium Price Stock Option Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement dated March
30, 1998)
10.25 First Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan (incorporated by reference to Exhibit 10.0 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
10.26* Second Amendment to the Mattel, Inc. 1997 Premium Price Stock Option
Plan
10.27 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 the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
10.28 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 the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998)
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
13.0* Pages 24 through 54 of the Mattel, Inc. Annual Report to
Stockholders for the year ended December 31, 1998
21.0* Subsidiaries of the Registrant
23.0* Consent of PricewaterhouseCoopers LLP
23.1* Consent of Deloitte & Touche LLP
24.0* Power of Attorney (on page 27 of Form 10-K)
27.0* Financial Data Schedule (EDGAR filing only)
- --------
* Filed herewith.
25
(b) Reports on Form 8-K
Mattel, Inc. filed the following Current Reports on Form 8-K during the
quarterly period ended December 31, 1998:
Financial
Items Statements
Date of Report Reported Filed
-------------- -------- ----------
October 29, 1998....................................... 5 None
November 16, 1998...................................... 5 None
December 15, 1998...................................... 5, 7 None
(c) Exhibits Required by Item 601 of Regulation S-K
See Item (3) above
(d) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Allowances
Copies of Form 10-K (which includes Exhibit 24.0), Exhibits 11.0, 12.0,
13.0, 21.0, 23.0 and 23.1 and the Annual Report to Stockholders are
available to stockholders of the Company without charge. Copies of other
Exhibits can be obtained by stockholders of the Company 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.
26
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
Senior Vice President and
Corporate Controller
Date: As of March 31, 1999
POWER OF ATTORNEY
We, the undersigned directors and officers of Mattel, Inc. do hereby
severally constitute and appoint Jill E. Barad, Ned Mansour, Robert Normile,
Lee B. Essner, 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/ Jill E. Barad Chairman of the Board, March 31, 1999
____________________________________ President and Chief
Jill E. Barad Executive Officer
/s/ Harry J. Pearce Chief Financial Officer March 31, 1999
____________________________________ (principal financial
Harry J. Pearce officer)
/s/ Kevin M. Farr Senior Vice President and March 31, 1999
____________________________________ Corporate Controller
Kevin M. Farr (principal accounting
officer)
/s/ Harold Brown Director March 31, 1999
____________________________________
Harold Brown
/s/ Tully M. Friedman Director March 31, 1999
____________________________________
Tully M. Friedman
/s/ Joseph C. Gandolfo Director and President, March 31, 1999
____________________________________ Worldwide Manufacturing
Joseph C. Gandolfo Operations
27
Signature Title Date
--------- ----- ----
/s/ Ronald M. Loeb Director March 31, 1999
____________________________________
Ronald M. Loeb
/s/ Ned Mansour Director, President, March 31, 1999
____________________________________ Corporate Operations and
Ned Mansour General Counsel
/s/ Andrea L. Rich Director March 31, 1999
____________________________________
Andrea L. Rich
/s/ William D. Rollnick Director March 31, 1999
____________________________________
William D. Rollnick
/s/ Pleasant T. Rowland Vice Chairman of the Board March 31, 1999
____________________________________ and President, Pleasant
Pleasant T. Rowland Company
/s/ Christopher A. Sinclair Director March 31, 1999
____________________________________
Christopher A. Sinclair
Director
____________________________________
Bruce L. Stein
/s/ John L. Vogelstein Director March 31, 1999
____________________________________
John L. Vogelstein
28
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Mattel, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 1, 1999 appearing on page 52 of the December 31, 1998
Annual Report to Stockholders of Mattel, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 1, 1999
29
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, 1998...... $30,737 $34,780 $(24,313)(a) $41,204
Year Ended December 31, 1997...... 21,009 21,036 (11,308)(a) 30,737
Year Ended December 31, 1996...... 13,119 21,381 (13,491)(a) 21,009
Allowance for Inventory
Obsolescence
Year Ended December 31, 1998...... $33,774 $65,251 $(41,703)(b) $57,322
Year Ended December 31, 1997...... 35,645 52,312 (54,183)(b) 33,774
Year Ended December 31, 1996...... 30,620 73,004 (67,979)(b) 35,645
- --------
(a) Includes write-offs, recoveries of previous write-offs, and currency
translation adjustments. Increase in net deductions over 1997 is due to
beginning balances from acquired companies ($1.4 million) and transfers to
legal reserve for insolvent customers ($11.6 million).
(b) Primarily represents relief of previously established reserves resulting
from the disposal of related inventory, raw materials, write-downs and
currency translation adjustments.
30