-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NFyjtYjOIccVnNdCSribN/bEYhdyrXN4K8E/06HcRvnJunpRwYW6yRAz7v/bRu5K X1Q8guTnEDXj4FuliniQcw== 0000898430-99-004172.txt : 19991115 0000898430-99-004172.hdr.sgml : 19991115 ACCESSION NUMBER: 0000898430-99-004172 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTEL INC /DE/ CENTRAL INDEX KEY: 0000063276 STANDARD INDUSTRIAL CLASSIFICATION: DOLLS & STUFFED TOYS [3942] IRS NUMBER: 951567322 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05647 FILM NUMBER: 99747196 BUSINESS ADDRESS: STREET 1: 333 CONTINENTAL BLVD CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3102522000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-05647 ----------- MATTEL, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-1567322 - ------------------------------------------------------------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Continental Boulevard, El Segundo, California 90245-5012 - ------------------------------------------------------------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (310) 252-2000 -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) None --------------------------------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of shares outstanding of registrant's common stock as of November 4, 1999 Common Stock - $1 par value - 420,777,356 shares PART I -- FINANCIAL INFORMATION Mattel, Inc. and Subsidiaries Consolidated Balance Sheets
Sept. 30, Sept. 30, Dec. 31, (In thousands) 1999 1998 1998 - ----------------------------------------------------------------------------------------------------------------------- Assets Current Assets Cash $ 92,714 $ 377,385 $ 469,213 Accounts receivable, net 2,000,868 1,898,943 1,150,051 Inventories 742,704 808,555 644,270 Prepaid expenses and other current assets 471,147 377,053 371,772 - ----------------------------------------------------------------------------------------------------------------------- Total current assets 3,307,433 3,461,936 2,635,306 - ----------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment Land 35,580 37,138 35,113 Buildings 274,328 254,054 271,580 Machinery and equipment 600,951 583,386 569,428 Capitalized leases 23,271 23,362 23,271 Leasehold improvements 63,196 95,190 98,400 - ----------------------------------------------------------------------------------------------------------------------- 997,326 993,130 997,792 Less: accumulated depreciation 459,772 433,822 422,020 - ----------------------------------------------------------------------------------------------------------------------- 537,554 559,308 575,772 Tools, dies and molds, net 190,387 183,383 187,349 - ----------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 727,941 742,691 763,121 - ----------------------------------------------------------------------------------------------------------------------- Other Noncurrent Assets Intangible assets, net 1,411,603 1,501,903 1,484,634 Other assets 288,880 272,854 264,324 - ----------------------------------------------------------------------------------------------------------------------- $5,735,857 $5,979,384 $5,147,385 =======================================================================================================================
The accompanying notes are an integral part of these financial statements. Consolidated results for all periods presented have been restated retroactively for the effects of the May 1999 merger with The Learning Company, Inc. ("Learning Company"), accounted for as a pooling of interests. See Note 11. 2 Mattel, Inc. and Subsidiaries Consolidated Balance Sheets (Continued)
Sept. 30, Sept. 30, Dec. 31, (In thousands, except share data) 1999 1998 1998 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity Current Liabilities Short-term borrowings $ 945,447 $ 917,228 $ 199,006 Current portion of long-term liabilities 133,285 13,769 33,666 Accounts payable 421,042 424,223 362,467 Accrued liabilities 792,830 822,121 748,837 Income taxes payable 194,162 280,257 299,058 - ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 2,486,766 2,457,598 1,643,034 - ---------------------------------------------------------------------------------------------------------------------------- Long-Term Liabilities Medium-term notes 540,500 520,500 540,500 Senior notes 500,955 590,955 600,955 Mortgage note 42,542 43,154 43,007 Other 159,932 143,362 149,086 - ---------------------------------------------------------------------------------------------------------------------------- Total long-term liabilities 1,243,929 1,297,971 1,333,548 - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock, Series A $0.01 par value, $200.00 liquidation preference per share, 0.8 million shares authorized, issued and outstanding at September 30, 1998 and December 31, 1998, respectively - 8 8 Preferred stock, Series C $1.00 par value, $125.00 liquidation preference per share, 0.8 million shares authorized, issued and outstanding at September 30, 1998 and December 31, 1998, respectively - 772 772 Special voting preferred stock $1.00 par value, $10.00 liquidation preference per share, one share authorized, issued and outstanding, representing the voting rights of 3.9 million, 5.3 million, and 5.2 million outstanding exchangeable shares, respectively - - - Common stock $1.00 par value, 1.0 billion shares authorized; 432.8 million shares, 402.9 million shares, and 405.1 million shares issued, respectively 432,766 402,900 405,114 Additional paid-in capital 1,739,226 1,810,203 1,845,222 Deferred compensation - (12,588) (12,265) Treasury stock at cost; 11.8 million shares, 10.2 million shares, and 14.3 million shares, respectively (389,551) (351,474) (495,347) Retained earnings 458,524 588,924 625,197 Accumulated other comprehensive loss (235,803) (214,930) (197,898) - ---------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,005,162 2,223,815 2,170,803 - ---------------------------------------------------------------------------------------------------------------------------- $5,735,857 $5,979,384 $5,147,385 ============================================================================================================================
The accompanying notes are an integral part of these financial statements. Consolidated results for all periods presented have been restated retroactively for the effects of the May 1999 merger with Learning Company, accounted for as a pooling of interests. See Note 11. 3 Mattel, Inc. and Subsidiaries Consolidated Statement of Operations
For the For the Three Months Ended Nine Months Ended --------------------------------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, (In thousands, except per share amounts) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Net Sales $1,825,247 $1,884,843 $3,744,360 $3,802,852 Cost of sales 957,961 888,753 1,926,076 1,857,634 - --------------------------------------------------------------------------------------------------------------------- Gross Profit 867,286 996,090 1,818,284 1,945,218 Advertising and promotion expenses 296,436 281,726 549,670 535,931 Other selling and administrative expenses 331,934 278,059 836,562 783,553 Amortization of intangibles 22,765 20,674 65,193 103,365 Charge for incomplete technology - - - 56,826 Restructuring and other charges - 97,088 348,889 133,205 Interest expense 41,019 42,346 102,463 83,609 Other (income) expense, net (846) 8,870 (8,845) (1,199) - --------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Income Taxes 175,978 267,327 (75,648) 249,928 Provision (benefit) for income taxes 40,645 98,593 (11,696) 132,573 - --------------------------------------------------------------------------------------------------------------------- Net Income (Loss) 135,333 168,734 (63,952) 117,355 Less: preferred stock dividend requirements - 1,990 3,980 5,970 - --------------------------------------------------------------------------------------------------------------------- Net Income (Loss) Applicable to Common Shares $ 135,333 $ 166,744 $ (67,932) $ 111,385 ===================================================================================================================== Basic Income (Loss) Per Common Share Net income (loss) $ 0.32 $ 0.42 $ (0.17) $ 0.29 ===================================================================================================================== Weighted average number of common shares 425,148 399,218 410,316 387,020 ===================================================================================================================== Diluted Income (Loss) Per Common Share Net income (loss) $ 0.32 $ 0.39 $ (0.17) $ 0.27 ===================================================================================================================== Weighted average number of common and common equivalent shares 429,455 435,123 410,316 419,870 ===================================================================================================================== Dividends Declared Per Common Share $ 0.09 $ 0.08 $ 0.26 $ 0.23 =====================================================================================================================
The accompanying notes are an integral part of these financial statements. Consolidated results for all periods presented have been restated retroactively for the effects of the May 1999 merger with Learning Company, accounted for as a pooling of interests. See Note 11. 4 Mattel, Inc. and Subsidiaries Consolidated Statements of Cash Flows
For the Nine Months Ended ---------------------------------- Sept. 30, Sept. 30, (In thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net (loss) income $ (63,952) $ 117,355 Adjustments to reconcile net (loss) income to net cash flows from operating activities: Noncash restructuring and integration charges 68,771 22,981 Depreciation 146,174 129,384 Amortization 67,537 105,272 Charges for incomplete technology - 56,826 (Decrease) increase from changes in assets and liabilities: Accounts receivable (879,631) (610,494) Inventories (110,756) (231,991) Prepaid expenses and other current assets (122,402) (30,305) Accounts payable, accrued liabilities and income taxes payable (7,609) 12,059 Deferred income taxes 9,605 (4,332) Other, net 5,233 (2,489) - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows used for operating activities (887,030) (435,734) - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Purchases of tools, dies and molds (81,491) (82,865) Purchases of other property, plant and equipment (71,936) (130,218) Payment for acquisitions, net of cash acquired (5,664) (881,222) Proceeds from sale of business and other property, plant and equipment 2,303 14,704 Investment in other long-term assets (20,859) (7,483) Other, net (1,399) (1,591) - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows used for investing activities (179,046) (1,088,675) - ---------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Short-term borrowings, net 760,751 826,675 Proceeds from issuance of notes - 300,000 Proceeds from issuance of special warrants - 134,346 Payments of long-term debt - (106,475) Exercise of stock options including related tax benefit 71,981 140,800 Purchase of treasury stock (51,047) (198,268) Payment of dividends on common and preferred stock (87,791) (72,539) Other, net (1,777) (4,220) - ---------------------------------------------------------------------------------------------------------------------------- Net cash from financing activities 692,117 1,020,319 - ---------------------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash (2,540) (2,428) - ---------------------------------------------------------------------------------------------------------------------------- (Decrease) in Cash (376,499) (506,518) Cash at Beginning of Period 469,213 883,903 - ---------------------------------------------------------------------------------------------------------------------------- Cash at End of Period $ 92,714 $ 377,385 ============================================================================================================================
The accompanying notes are an integral part of these statements. Consolidated results for all periods presented have been restated retroactively for the effects of the May 1999 merger with Learning Company, accounted for as a pooling of interests. See Note 11. 5 Mattel, Inc. and Subsidiaries Notes to Consolidated Financial Information 1. The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The Learning Company division's fiscal year is the 52 or 53 weeks ending on or after December 31. Therefore, the financial results of the Learning Company division included within the accompanying consolidated financial statements and related disclosures are as of and for the periods ended October 2, 1999 and October 3, 1998. In the opinion of management, all adjustments considered necessary for a fair presentation of Mattel, Inc. and its subsidiaries' ("Mattel") financial position and interim results as of and for the periods presented have been included. Financial data for all periods presented reflect the retroactive effect of the merger, accounted for as a pooling of interests, with The Learning Company, Inc. consummated in May 1999. See Note 11. Certain amounts in the financial statements for prior periods have been reclassified to conform with the current period's presentation. Because Mattel's business is seasonal, results for interim periods are not necessarily indicative of those which may be expected for a full year. 2. The financial information included herein should be read in conjunction with Mattel's consolidated financial statements and related notes in its 1998 Annual Report to Stockholders filed on Forms 10-K and 10-K/A and its supplementary consolidated financial statements and related notes for the years ended December 31, 1998, 1997 and 1996 filed on Form 8-K on June 11, 1999. 3. Accounts receivable are shown net of allowances of $176.0 million (September 30, 1999), $79.3 million (September 30, 1998), and $125.1 million (December 31, 1998). 4. Inventories are comprised of the following:
(In thousands) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- Raw materials and work in progress $ 70,918 $ 69,417 $ 48,473 Finished goods 671,786 739,138 595,797 - -------------------------------------------------------------------------------------------------------------------------- $742,704 $808,555 $644,270 ==========================================================================================================================
5. Intangibles, net include the following:
(In thousands) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- Goodwill, net $1,291,239 $1,343,461 $1,335,183 Other 120,364 158,442 149,451 - -------------------------------------------------------------------------------------------------------------------------- $1,411,603 $1,501,903 $1,484,634 ==========================================================================================================================
6 6. Senior notes include the following:
(In thousands) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998 - -------------------------------------------------------------------------------------------------------------------------- 5-1/2% due 2000 $200,955 $190,955 $200,955 6-3/4% due 2000 - 100,000 100,000 6% due 2003 150,000 150,000 150,000 6-1/8% due 2005 150,000 150,000 150,000 - -------------------------------------------------------------------------------------------------------------------------- $500,955 $590,955 $600,955 ==========================================================================================================================
7. Comprehensive (loss) income is as follows:
For the Nine Months Ended --------------------------------------------- (In thousands) Sept. 30, 1999 Sept. 30, 1998 - --------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (63,952) $117,355 Unrealized gain on securities: Unrealized holding gains (losses) arising during the period 2,800 (425) Less: reclassification adjustment for realized gains included in net loss (11,143) - Currency translation adjustments (29,562) (4,039) - --------------------------------------------------------------------------------------------------------------------- Total comprehensive (loss) income $(101,857) $112,891 =====================================================================================================================
8. Supplemental disclosure of cash flow information is as follows:
For the Nine Months Ended ---------------------------------------------- (In thousands) Sept. 30, 1999 Sept. 30, 1998 - ------------------------------------------------------------------------------------------------------------------------ Cash payments during the period: Interest $91,334 $65,799 Income taxes 57,935 82,938 Noncash investing and financing activities during the period: Common stock issued for acquisitions: Settlement of earn-out agreements $ 5,547 $ 5,573 Sofsource, Inc. - 45,000 Mindscape, Inc. - 30,000 Conversion of 5-1/2% senior notes - 96,695 - ------------------------------------------------------------------------------------------------------------------------
9. In the current quarter, the board of directors declared cash dividends of $0.09 per common share, compared to $0.08 per common share in the 1998 third quarter. 10. 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. 7 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. Diluted earnings available to common stockholders represent earnings available to common stockholders plus preferred stock dividend requirements and interest savings resulting from the assumed conversion of dilutive securities. Diluted earnings per share presented for the nine months ended September 30, 1999 is the same as basic earnings per share due to Mattel's net loss position. Premium price stock options totaling 18.6 million, other nonqualified stock options totaling 19.2 million and convertible debt were excluded from the calculation of diluted earnings per share in the 1999 third quarter because they were anti- dilutive. Premium price stock options totaling 18.7 million and convertible debt were excluded from the calculation of diluted earnings per share in the 1998 third quarter because they were anti-dilutive. Premium price stock options totaling 18.0 million, Series C preferred stock and convertible debt were excluded from the calculation of diluted earnings per shares for the nine months ended September 30, 1998 because they were anti-dilutive. 11. Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a merger was consummated between Mattel and Learning Company on May 13, 1999. The stock-for-stock transaction was approved by the stockholders of each company, after which Learning Company was merged with and into Mattel, with Mattel being the surviving corporation. Each share of Learning Company Series A Preferred Stock was converted into 20 shares of Learning Company common stock immediately prior to the consummation of the merger. Pursuant to the merger agreement, each outstanding share of Learning Company common stock was 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., remains outstanding, but upon consummation of the merger became exchangeable for 1.2 shares of Mattel common stock. This transaction has been accounted for as a pooling of interests, and accordingly, financial information for periods prior to the merger reflect retroactive restatement of the companies' combined financial position and operating results. For periods preceding the merger, there were no material intercompany transactions which required elimination from the combined consolidated results of operations and there were no adjustments necessary to conform the accounting practices of the two companies. 8 Selected financial information for the combining entities included in the consolidated statements of operations for the nine month period ended September 30, 1998 is shown below. Although the merger was effective on May 13, 1999, interim financial information for the combining companies was not available as of that date; therefore, information for and as of March 31, 1999 has been presented.
For the Period Ended --------------------------------------- March 31, Sept. 30, (In thousands) 1999 1998 - --------------------------------------------------------------------------- Net sales Mattel $692,116 $3,238,810 Learning Company 186,843 564,042 - --------------------------------------------------------------------------- Combined $878,959 $3,802,852 =========================================================================== Net (loss) income Mattel $(17,856) $ 272,718 Learning Company (a) 22,905 (155,363) - --------------------------------------------------------------------------- Combined $ 5,049 $ 117,355 ===========================================================================
(a) The (benefit) provision for income taxes has been adjusted by $(0.6) million and $11.0 million in 1999 and 1998, respectively, to reflect the reduction of valuation allowances established in Learning Company's historical financial statements resulting in the recognition of estimated benefits of net operating losses incurred by Learning Company. 12. During the second quarter of 1999, Mattel completed its merger with Learning Company and finalized a previously announced plan of restructuring and integration. These actions, along with other one-time events, resulted in a non-recurring pre-tax charge against operations of $345.0 million, $267.0 million after tax or $0.65 per share. Of the total pre-tax charge, approximately $276 million represents cash expenditures. The restructuring and integration plan, expected to be substantially complete by June 2000, provides for the consolidation and realignment of Mattel's operations. The plan is aimed at leveraging global resources in areas of manufacturing, marketing and distribution, eliminating duplicative functions worldwide and achieving improved operating efficiencies. The following are the major restructuring and integration initiatives: . Consolidation of the Infant and Preschool businesses; . Consolidation of the domestic and international back-office functions; . Consolidation of direct marketing operations; . Realignment of the North American sales force; . Termination of various international distributor contracts; and . Closure of four higher cost manufacturing facilities. 9 Components of the restructuring and other non-recurring charges recorded in the second quarter of 1999 and amounts incurred through September 30, 1999 are as follows:
Total Charge Balance June 30, Amount Sept. 30, (In millions) 1999 Incurred 1999 - --------------------------------------------------------------------------------------------------------------- Severance and other compensation $108 $ 23 $ 85 Distributor, license and other contract terminations 57 39 18 Writedown of assets 42 42 - Lease termination costs 22 - 22 - --------------------------------------------------------------------------------------------------------------- Total restructuring costs and asset writedowns 229 104 125 Merger-related transaction and other costs 86 73 13 Other non-recurring charges 30 12 18 - --------------------------------------------------------------------------------------------------------------- Total restructuring, asset writedowns and other charges $345 $189 $156 ===============================================================================================================
Severance and other compensation costs relate to the termination of approximately 4,100 employees around the world. Approximately 3,200 of these employees are hourly workers located in certain of Mattel's manufacturing facilities, of which approximately 2,200 were employed in the manufacturing facility in Kuala Lumpur, which ceased operations in September 1999. The remainder of the work force reductions consists of downsizing sales and marketing groups in the US, Europe and Asia-Pacific regions as well as the elimination of duplicate administrative personnel following the consolidation of back-office functions, the majority of which are in Europe. As of September 30, 1999, approximately $23 million had been paid to nearly 2,500 terminated employees. Cash severance payments will extend beyond the completion of the workforce reductions due to the severance payment options available to affected employees. Mattel terminated its sponsorship agreements related to certain attractions for a total cost of $37.5 million, inclusive of the writeoff of related capitalized costs. The cash portion of this charge was paid as of July 1999. Mattel also recognized a $19.5 million charge, mainly related to settlements for termination of certain foreign distributor agreements in conjunction with the realignment of its sales and distribution network. Mattel's restructuring plan resulted in the impairment of certain long-lived assets related to the operations being closed. The sum of the undiscounted future cash flows of these assets was not sufficient to cover the carrying amount of these assets. As a result, these long-lived assets were written down to fair market value and will be depreciated over their remaining useful lives. Fair value of the impaired assets was determined by either third-party appraisals or past experience in disposing of similar assets. Buildings and, to the extent possible, equipment will be sold while the remainder of the impaired assets will be abandoned when taken out of service. Nearly all of the revenue-generating activities related to these assets will continue as a result of more effective utilization of other assets. A significant portion of the fixed asset writedowns is concentrated in the Operations and Learning Company segments. Two of the four manufacturing facilities ceased production during the third quarter of 1999. In addition, other asset writeoffs include approximately $10 million of goodwill related to a recently acquired software business, which was closed following the merger with Learning Company. 10 Lease termination costs include penalties imposed upon canceling existing leases and future obligations under long-term rental agreements at facilities being vacated following the merger and realignment. Merger-related transaction costs consist of investment banking fees, legal, accounting and printing costs, registration fees and other costs recognized in connection with the merger. Also included in this amount are the contractual change of control payments arising from the merger. The majority of all merger-related transaction costs were paid during the second quarter of 1999. Other non-recurring charges include an additional $16.0 million related to the October 1998 recall of Mattel's Power Wheels(R) vehicles and $14.0 million for environmental remediation costs related to a manufacturing facility on a leased property in Beaverton, Oregon, based on the completion and approval of the remediation plan and feasibility study. 13. On June 16, 1999, Mattel issued a notice to holders of its Series C Mandatorily Convertible Redeemable Preferred Stock and to the holders of the related Depositary Shares informing them of Mattel's optional redemption of these securities on July 1, 1999. On that date, each share of Series C Preferred Stock was redeemed in exchange for 10.015914 shares of Mattel common stock, and each Depositary Share was redeemed in exchange for 0.400637 shares of Mattel common stock. Dividends on the Series C Preferred Stock and the related Depositary Shares ceased to accrue on July 1, 1999. 14. During 1998, Mattel acquired Pleasant Company and Bluebird Toys PLC, while Learning Company acquired Mindscape, Inc. and Sofsource, Inc. These acquisitions were accounted for using the purchase method of accounting. The results of operations of the acquired companies have been included in Mattel's consolidated financial statements from their respective dates of acquisition. The unaudited pro forma results of operations for the 1998 acquisitions accounted for using the purchase method of accounting for the nine month period ended September 30, 1998 are as follows:
Acquired Pro Forma (In thousands, except per share data) Mattel Companies Combined - --------------------------------------------------------------------------------------------------------------- Net sales $3,802,852 $ 103,862 $3,906,714 Income (loss) before extraordinary item 117,355 (102,175) 15,180 Net income (loss) 117,355 (102,175) 15,180 Basic income per share 0.29 0.02 Diluted income per share 0.27 0.02 - ---------------------------------------------------------------------------------------------------------------
11 The amounts shown for acquired companies assume that the acquisitions of Pleasant Company, Mindscape, Inc., Bluebird Toys PLC, and Sofsource, Inc. occurred on January 1, 1998. Pro forma adjustments have been made to reflect the amortization of intangible assets and goodwill capitalized as a result of the acquisitions, incremental interest expense that would have been incurred as a result of financing the acquisition of Pleasant Company as of January 1, 1998, and elimination of intercompany sales and margins related to the acquisition of Bluebird Toys PLC. 15. Mattel's reportable segments are separately managed business units and include toy marketing, toy manufacturing, and consumer software sales and development. The toy marketing segment is divided on a geographic basis between domestic and international. The domestic toy marketing segment is further divided into USA Toys, US Fisher-Price/Tyco Preschool and Other. USA Toys principally sells products in the Girls, Entertainment and Wheels categories, while US Fisher-Price/Tyco Preschool principally sells Infant and Preschool products. The Other toy segment is principally involved in selling specialty products in the Girls category. The international toy marketing segment sells products in all categories. The consumer software segment is comprised of educational and entertainment products developed and sold by Learning Company on a worldwide basis. Mattel's toy manufacturing segment, Operations, manufactures toy products, which are sold to the marketing segments based on intercompany transfer prices. Such prices are based on manufacturing costs plus a profit margin. Toy segment revenues do not include sales adjustments such as trade discounts and other allowances. However, such adjustments are included in the determination of segment profit (loss) from operations. Segment profit (loss) from operations represents income before restructuring and other charges, interest expense, and provision (benefit) for income taxes as reported in the consolidated statements of operations. Segment assets are comprised of accounts receivable and inventories, net of applicable reserves and allowances.
Revenues For the Three Months Ended For the Nine Months Ended ------------------------------------------------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, (In thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------ Toy Marketing USA Toys $ 821,859 $ 841,880 $1,489,198 $1,569,583 US Fisher-Price/Tyco Preschool 307,552 298,723 637,666 673,765 Other segments 50,441 52,774 138,344 66,918 International 550,338 590,074 1,077,085 1,142,880 Learning Company 194,956 212,723 605,318 564,042 Operations 546,910 514,555 1,034,291 1,143,912 - ------------------------------------------------------------------------------------------------------------ Segment total 2,472,056 2,510,729 4,981,902 5,161,100 Elimination of intersegment sales (546,910) (514,154) (1,034,291) (1,141,786) Sales adjustments (99,899) (111,732) (203,251) (216,462) - ------------------------------------------------------------------------------------------------------------ Net sales $1,825,247 $1,884,843 $3,744,360 $3,802,852 ============================================================================================================
12
Operating Profit (Loss) For the Three Months Ended For the Nine Months Ended ------------------------------------------------------------ Sept. 30, Sept. 30, Sept. 30, Sept. 30, (In thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------ Toy Marketing USA Toys $ 160,912 $185,289 $ 216,452 $ 281,602 US Fisher-Price/Tyco Preschool 44,637 46,444 56,107 72,314 Other segments (10,302) (7,270) (34,592) (9,470) International 83,166 105,448 67,884 110,018 Learning Company (132,548) 54,517 (22,296) 40,934 Operations 97,336 59,797 163,120 121,342 - ------------------------------------------------------------------------------------------------------------ Segment total 243,201 444,225 446,675 616,740 Restructuring and other charges - (97,088) (348,889) (133,205) Charge for incomplete technology - - - (56,826) Interest expense (41,019) (42,346) (102,463) (83,609) Corporate and other (26,204) (37,464) (70,971) (93,172) - ------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes $ 175,978 $267,327 $ (75,648) $ 249,928 ============================================================================================================
Assets Sept. 30, Sept. 30, (In thousands) 1999 1998 - --------------------------------------------------------------------------------------------- Toy Marketing USA Toys $ 903,156 $1,039,917 US Fisher-Price/Tyco Preschool 388,090 439,425 Other segments 127,424 117,107 International 886,985 900,045 Learning Company 382,990 161,754 Operations 82,002 93,416 - --------------------------------------------------------------------------------------------- Segment total 2,770,647 2,751,664 Corporate and other (27,075) (44,166) - --------------------------------------------------------------------------------------------- Accounts receivable and inventories, net $2,743,572 $2,707,498 =============================================================================================
16. Following Mattel's announcement on October 4, 1999, that it expected an earnings shortfall at its Learning Company division in the third quarter of 1999, several of Mattel's stockholders filed purported class action complaints in the United States District Courts for the Central District of California, the Southern District of New York, and the District of Massachusetts, naming Mattel and certain of its officers and directors as defendants. The complaints generally allege, among other things, that defendants made false or misleading statements that artificially inflated the price of Mattel common stock by overstating the revenues and net income of Mattel and Learning Company and by falsely representing that the Learning Company merger would be immediately accretive to Mattel's 1999 and 2000 financial results. In addition, a Mattel stockholder filed a derivative complaint on behalf and for the benefit of Mattel in the Superior Court of the State of California, County of Los Angeles. The complaint alleges that Mattel's directors breached their fiduciary duties, wasted corporate assets and grossly mismanaged Mattel in connection with Mattel's merger with Learning Company and seeks both monetary and injunctive relief. Mattel believes the lawsuits are without merit and intends to defend them vigorously. 13 Mattel, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Certain expectations and projections regarding the future performance of Mattel, Inc. and its subsidiaries ("Mattel") discussed in this quarterly report are forward-looking and are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These expectations and projections are based on currently available competitive, financial, and economic data along with Mattel's operating plans and are subject to certain future events and uncertainties. Forward-looking statements can be identified by the use of forward-looking terminology, such as "may", "will", "should", "expect", "anticipate", "estimate", "project", "continue", "plans", "intends" or other similar terminology. Management cautions you that the following factors, among others, could cause Mattel's actual consolidated results of operations and financial position in 1999 and thereafter to differ significantly from those expressed in forward-looking statements: Marketplace Risks - - Increased competitive pressure, both domestically and internationally, which may negatively affect the sales of Mattel's products - - Significant changes in the buying patterns of major customers, such as the recent shift by some retailers to just-in-time inventory management, which may limit Mattel's ability to accurately forecast reorders or cause a decrease in sales after related expenses have already been incurred - - Dependence on the timely development, introduction and customer acceptance of new products, which may affect Mattel's ability to successfully redesign, restyle and extend existing core products and product lines and successfully bring new products to market - - Significant changes in the play patterns of children, whereby they are increasingly attracted to more developmentally advanced products at younger ages, which may affect brand loyalty and the perceived value of and demand for Mattel's products - - Possible weaknesses in economic conditions, both domestically and internationally, which may negatively affect the sales of Mattel's products and the costs associated with manufacturing and distributing these products - - Further slowdown in the growth rate of sales in the CD-ROM market and increased competitive pressure from the internet and other new technologies, which may negatively affect the market for existing CD-ROM products Financial Considerations - - Currency fluctuations, which may affect Mattel's reportable income - - Significant changes in interest rates, both domestically and internationally, which may negatively affect Mattel's cost of financing both its operations and investments Merger-Related Risks - - Difficulty integrating the operations of The Learning Company, Inc. ("Learning Company") into Mattel following the May 1999 merger, which may impede Mattel's ability to achieve savings or operating synergies from the merger 14 Year 2000 Compliance - - Potential inability of computer systems or software products used by Mattel and/or its customers and suppliers to properly recognize and process date- sensitive information beyond January 1, 2000, which may result in an interruption in normal business operations of Mattel, its suppliers and customers Other Risks - - Inability to achieve cost savings expected as part of restructuring activities, which may result in higher than expected costs following such restructurings - - Inability to successfully complete licensing and e-commerce deals in a timely fashion, which may reduce Mattel's ability to realize the full value of its intellectual property rights - - Development of new technologies, including the Internet, which may create new risks to Mattel's ability to protect its intellectual property rights - - Changes in laws or regulations, both domestically and internationally, including those affecting consumer products, environmental activities or trade restrictions, which may lead to increased costs or interruption in normal business operations of Mattel - - Current and future litigation, governmental proceedings or environmental matters, which may lead to increased costs or interruption in normal business operations of Mattel - - Other factors and risks that may be described from time to time in Mattel's public announcements and filings with the Securities and Exchange Commission Summary Mattel designs, manufactures, and markets a broad variety of children's products on a worldwide basis through both sales to retailers and direct to consumers. Additionally, Mattel develops and markets consumer software for home personal computers largely through its Learning Company division. Mattel's business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines, to design and develop innovative new products and product lines and to expand its marketing capability. 15 Mattel plans to continue to focus on its portfolio of brands that have fundamental play patterns and have historically had worldwide appeal, have been sustainable, and have delivered consistent profitability. Mattel's portfolio of brands can be grouped into the following categories: Girls - including Barbie(R) fashion rolls and accessories, collector dolls, American Girl(R), Cabbage Patch Kids(R), and Polly Pocket(R) Infant and Preschool - including Fisher-Price(R), Disney preschool and plush, Power Wheels(R), Sesame Street(R), See `N Say(R), Magna Doodle(R), View-Master(R), and Blue's Clues(R) Wheels - including Hot Wheels(R), Matchbox(R), Tyco(R) Electric Racing, and Tyco(R) Radio Control Entertainment - including Disney, Nickelodeon(R), games, and puzzles Consumer Software - including Reader Rabbit(R), Carmen Sandiego(TM), The Oregon Trail(R), and Myst(R) Mattel's business is seasonal, and, therefore, results of operations are comparable only with corresponding periods. Results of Operations - Third Quarter Consolidated Results Net income for the third quarter of 1999 was $135.3 million or $0.32 per diluted share as compared to net income of $168.7 million or $0.39 per diluted share in the third quarter of 1998. Profitability in the third quarter of 1999 was negatively impacted by Learning Company distributor and retailer returns and allowances of approximately $58 million; increased bad debt reserves of approximately $56 million, including $35 million related to one of Learning Company's major distributors; and Mattel's decision not to complete a significant Learning Company e-commerce and licensing transaction which was expected to generate approximately $60 million in pre-tax earnings. Third quarter 1998 results of operations were negatively impacted by non-recurring charges, including restructuring and other charges of $59.1 million related to 1998 acquisitions and a $38.0 million charge for the voluntary recall of Power Wheels(R) battery-powered ride-on vehicles. Total non-recurring charges of approximately $65 million, net of taxes, impacted the 1998 third quarter earnings by $0.15 per share.
For the Three Months Ended ------------------------------------------ Sept. 30, Sept. 30, 1999 1998 - ------------------------------------------------------------------------------------------ Net sales 100% 100% ========================================================================================== Gross profit 47.5% 52.8% Advertising and promotion expenses 16.2 14.9 Other selling and administrative expenses 18.2 14.8 Amortization of intangibles 1.2 1.1 Restructuring and other charges - 5.1 Other (income) expense, net - 0.5 - ------------------------------------------------------------------------------------------ Operating profit 11.9 16.4 Interest expense 2.2 2.2 - ------------------------------------------------------------------------------------------ Income before income taxes 9.7% 14.2% ==========================================================================================
16 Net sales in the third quarter of 1999 decreased 3% to $1,825.2 million, from $1,884.8 million in 1998. Sales to customers within the US decreased 2% and accounted for 71% and 70% of consolidated sales in the 1999 and 1998 third quarters, respectively. Sales to customers outside the US decreased 7% from the year ago quarter, largely impacted by lower sales in Europe. Mattel is currently working on an extensive market-specific strategy with the goal of improving sales of its core product lines in the International markets. Sales in the Girls category decreased 9% as a result of a decline in Barbie(R) sales, partially offset by an increase in sales of American Girl(R) products. Sales in the Infant and Preschool category declined 1%, mainly due to a decrease in Power Wheels(R) sales. This decrease was largely offset by increased sales of core Fisher-Price(R) products and Sesame Street(R) products. Sales of Wheels products increased 12%, demonstrating continued strength across Hot Wheels(R), Matchbox(R), and Tyco(R) Radio Control. Sales of Entertainment products, including Disney and Nickelodeon(R), decreased 4% due to fewer properties introduced this year versus the same quarter last year. Sales of Learning Company consumer software products decreased 8%, mainly due to higher than expected product returns resulting from a weakness in the CD-ROM market and disruption of Learning Company's distribution channels associated with Mattel's merger with Learning Company. This decrease was partially offset by an increase in licensing revenues. Licensing revenues grew from approximately $11 million in the third quarter of 1998 to $25 million in the third quarter of 1999, largely generated from a licensing agreement with Genealogy.com. Gross profit, as a percentage of net sales, was 47.5% in the third quarter of 1999, down from 52.8% in the third quarter of 1998 largely due to lower profit margin at Learning Company as a result of distributor and retailer returns and allowances, overall change in product mix, and slightly higher product costs due to strengthening currencies in countries where Mattel manufactures its products. As a percentage of net sales, advertising and promotion expenses increased from 14.9% in the third quarter of 1998 to 16.2% in the third quarter of 1999 mainly as a result of higher rebates offered to consumers on Learning Company products. Other selling and administrative expenses increased to 18.2% of net sales in the third quarter of 1999 from 14.8% in the third quarter of 1998 primarily due to increased Learning Company bad debt expense. Business Segment Results Mattel's reportable segments are separately managed business units and include toy marketing, toy manufacturing, and consumer software sales and development. The toy marketing segment is divided on a geographic basis between domestic and international. The domestic toy marketing segment is further divided into USA Toys, US Fisher-Price/Tyco Preschool and Other. USA Toys principally sells products in the Girls, Entertainment and Wheels categories, while US Fisher- Price/Tyco Preschool principally sells Infant and Preschool products. The Other toy segment is principally involved in selling specialty products in the Girls category. The international toy marketing segment sells products in all categories. The consumer software segment is comprised of educational and entertainment products developed and sold by Learning Company on a worldwide basis. 17 The USA Toys segment sales decreased $20.0 million as a result of lower sales of Entertainment products, partially offset by increased sales of Wheels products. The US Fisher-Price/Tyco Preschool segment sales grew by $8.8 million, largely due to higher sales of core Fisher-Price(R) products, partially offset by lower sales of Power Wheels(R) products. Sales in the Other segment decreased $2.3 million. The International segment sales decreased $39.7 million due to lower sales of Barbie(R) and Infant and Preschool products, partially offset by increased sales of Wheels products. The Learning Company segment sales decreased $17.8 million mainly due to higher than expected product returns resulting from a weakness in the CD-ROM market and disruption of Learning Company's distribution channels associated with Mattel's merger with Learning Company. This decrease was partially offset by an increase in licensing revenues. Licensing revenues grew from approximately $11 million in the third quarter of 1998 to $25 million in the third quarter of 1999, largely generated from a licensing agreement with Genealogy.com. The USA Toys segment operating profit declined $24.4 million to $160.9 million and the International segment operating profit decreased $22.3 million to $83.2 million, largely due to lower sales volume as well as an unfavorable shift in product mix and slightly higher product costs due to strengthening currencies. The US Fisher-Price/Tyco Preschool segment operating profit decreased $1.8 million to $44.6 million. The Other segment incurred an operating loss of $10.3 million in the third quarter of 1999 compared to a $7.3 million loss in the third quarter of 1998. The Learning Company segment realized a loss of $132.5 million in the third quarter of 1999 compared to a profit of $54.5 million in the third quarter of 1998. A slowdown in the growth rate of sales in the CD-ROM industry, increased competitive pressures, and disruption of Learning Company's distribution channels associated with Mattel's merger with Learning Company, caused Learning Company revenue to fall substantially below Mattel's projections for the third quarter of 1999 as well as the comparable quarter of 1998. In addition, anticipated revenue related to a significant e-commerce and licensing transaction was not realized because Mattel determined that the terms of the transaction would not be in the best interests of Mattel and its stockholders. Mattel views e-commerce and licensing transactions to be a significant source of potential revenues for Mattel, including its Learning Company division, and intends to continue to seek to consummate such transactions. Learning Company revenue and operating expenses for the third quarter of 1999 also were impacted by significant adjustments resulting from the following changes in accounting estimates:
(In millions) - ---------------------------------------------------------------------------------------- Increased provision for returns and other customer deductions $ 58 Increased provision for doubtful accounts and other account receivable writeoffs 56 Other 18 - ---------------------------------------------------------------------------------------- Total $132 ========================================================================================
18 During the third quarter of 1999, Mattel reevaluated the required allowance for returns in light of higher than normal returns and other deductions taken by distributors and certain major retail customers of Learning Company. Mattel believes it was necessary to increase the allowance primarily because of a slowdown in the CD-ROM industry sell-through identified in the third quarter of 1999, and because Mattel reassessed its plans for the use of distributors in the United States. The increased provision for doubtful accounts includes $35 million related to the worsening financial condition of one of Learning Company's largest distributors. Mattel expects that Learning Company will not return to substantial profitability in the fourth quarter primarily due to an industry-wide slowdown in CD-ROM sales and because Mattel has reassessed its plans for the use of distributors in the United States. Results of Operations - Nine Months Consolidated Results Net loss for the first nine months of 1999 was $64.0 million or $0.17 per diluted share as compared to a net income of $117.4 million or $0.27 per diluted share in the first nine months of 1998. Profitability in the first nine months of 1999 was negatively impacted by restructuring and other charges totaling $348.9 million related to the Mattel restructuring plan, the merger and integration of Learning Company, and other non-recurring charges. Additionally, the first nine months results were negatively impacted by third quarter Learning Company distributor and retailer returns and allowances of approximately $58 million; increased bad debt reserves of approximately $56 million, including $35 million related to one of Learning Company's major distributors; and Mattel's decision not to complete a significant Learning Company licensing agreement which was expected to generate approximately $60 million in pre-tax earnings. Results of operations for the first nine months of 1998 were negatively impacted by a $56.8 million in-process technology writeoff related to the acquisition of Mindscape, Inc. in March 1998, restructuring and other charges of $95.2 million related to 1998 acquisitions, and a $38.0 million charge related to the voluntary recall of Power Wheels(R) battery-powered ride-on vehicles. Total non-recurring charges of approximately $270 million, net of taxes, impacted the 1999 nine month earnings by $0.66 per share. Total non-recurring charges of approximately $147 million, net of taxes, impacted the 1998 nine month earnings by $0.35 per share.
For the Nine Months Ended ------------------------------------------ Sept. 30, Sept. 30, 1999 1998 - ------------------------------------------------------------------------------------------ Net sales 100% 100% ========================================================================================== Gross profit 48.5% 51.2% Advertising and promotion expenses 14.7 14.1 Other selling and administrative expenses 22.3 20.6 Amortization of intangibles 1.7 2.7 Charge for incomplete technology - 1.5 Restructuring and other charges 9.3 3.5 Other income, net (0.2) - - ------------------------------------------------------------------------------------------ Operating profit 0.7 8.8 Interest expense 2.7 2.2 - ------------------------------------------------------------------------------------------ (Loss) income before income taxes (2.0)% 6.6% ==========================================================================================
19 Net sales in the first nine months of 1999 decreased 2% to $3,744.4 million, from $3,802.9 million in 1998. Sales to customers within the US remained unchanged and accounted for 72% and 71% of consolidated sales in the 1999 and 1998 nine months, respectively. Sales to customers outside the US decreased 6% in the first nine months of 1999 compared to the same period in 1998 largely impacted by lower sales in Europe. Sales in the Girls category decreased 1% largely due to a decline in Barbie(R) sales, partially offset by incremental sales of American Girl(R) products resulting from the Pleasant Company acquisition. Pleasant Company was acquired in July 1998 and therefore the results of operations for the first nine months of 1998 only reflect three months of results. Sales in the Infant and Preschool category declined 10% largely due to last year's success of `Tickle Me Elmo' and decreased Power Wheels(R) sales, partially offset by an increase in US sales of core Fisher-Price(R) products. Sales of Wheels products increased 13%, demonstrating continued strength across Hot Wheels(R), Matchbox(R), and Tyco(R) Radio Control. Sales of Entertainment products, including Disney and Nickelodeon(R), decreased 4%. Sales of Learning Company consumer software products increased 7%, mainly due to the acquisition of Mindscape, Inc., higher licensing revenues, and sales of new product lines. This was partially offset by increased distributor and retailer claims for returns and allowances due to a weakness in the CD-ROM market and disruption of Learning Company's distribution channels associated with Mattel's merger with Learning Company. The increase in licensing revenues of approximately $46 million was largely generated from licensing agreements, including Genealogy.com in the third quarter of 1999 and GoodHome in the second quarter of 1999. Mattel views e-commerce and licensing transactions to be a significant source of potential revenue for its Learning Company division and intends to continue to seek to consummate such transactions. Gross profit, as a percentage of net sales, was 48.5% in the first nine months of 1999 compared to 51.2% in the first nine months of 1998 largely due to lower profit margin at Learning Company as a result of distributor and retailer returns and allowances and overall change in product mix. As a percentage of net sales, advertising and promotion expenses increased from 14.1% in 1998 to 14.7% in 1999 mainly as a result of higher rebates offered to consumers on Learning Company products. Other selling and administrative expenses increased to 22.3% in 1999 from 20.6% in 1998 primarily due to increased Learning Company bad debt expense. Amortization of intangibles decreased by $38.2 million, mainly as a result of completed amortization of intangibles related to certain Learning Company acquisitions, partially offset by amortization of intangibles resulting from the 1998 acquisitions. Interest expense increased $18.9 million, primarily due to increased short- and long-term borrowings to finance Mattel's 1998 acquisitions. Business Segment Results The USA Toys segment sales decreased by $80.4 million compared to last year, mainly due to decreases in Disney Infant and Preschool products and Entertainment products. This decrease was partially offset by increased sales of Barbie(R) and Wheels products. The US Fisher-Price/Tyco Preschool sales decreased $36.1 million, primarily due 20 to lower Tyco Preschool sales in the first half of 1999 as a result of last year's success of Sesame Street(R) products, including `Tickle Me Elmo'. This was partially offset by an increase in sales of core Fisher-Price products. Sales in the Other segment increased $71.4 million due to incremental sales resulting from the July 1998 acquisition of the Pleasant Company. The International segment sales decreased $65.8 million mainly due to lower sales of Barbie(R) and Infant and Preschool products, partially offset by sales increases in Wheels and Entertainment products. The Learning Company segment sales increased $41.3 million mainly due to the acquisition of Mindscape Inc., higher licensing revenues, and sales of new product lines. This was partially offset by increased distributor and retailer claims for returns and allowances due to a weakness in the CD-ROM market and disruption of Learning Company's distribution channels associated with Mattel's merger with Learning Company. The increase in licensing revenues of approximately $46 million was largely generated from licensing agreements, including Genealogy.com in the third quarter of 1999 and GoodHome in the second quarter of 1999. The USA Toys segment operating profit declined $65.2 million to $216.5 million and the International segment operating profit decreased $42.1 million to $67.9 million. The US Fisher-Price/Tyco Preschool segment operating profit decreased $16.2 million to $56.1 million. The decline in operating profit in each of these segments is largely attributable to lower sales volume as well as an unfavorable shift in product mix. The Other segment incurred an operating loss of $34.6 million in the first nine months of 1999 compared to a $9.5 million loss in the first nine months of 1998, largely due to incremental amortization and overhead expenses resulting from the July 1998 acquisition of the Pleasant Company. The Learning Company segment realized a loss of $22.3 million in the first nine months of 1999 compared to a profit of $40.9 million in the first nine months of 1998. This profit decline was principally the result of distributor and retailer returns and allowances and increased bad debt reserves, partially offset by increased licensing revenues and lower amortization resulting from complete amortization of intangibles related to certain Learning Company acquisitions. Financial Position Mattel's cash position as of September 30, 1999 was $92.7 million compared to $377.4 million as of September 30, 1998. The $284.7 million decline was principally due to the repayment of Learning Company credit lines, the termination of Learning Company's receivable factoring facilities, and the payment of restructuring and integration charges related to the Learning Company merger. Cash decreased by $376.5 million since December 31, 1998 primarily due to the financing of seasonal working capital requirements, the repayment of Learning Company credit lines, the termination of Learning Company's receivable factoring facilities, and the payment of restructuring and integration charges related to the Learning Company merger. Accounts receivable, net increased by $101.9 million from the third quarter of 1998, primarily due to the cancellation of Learning Company's receivables factoring facility. Accounts receivable, net increased $850.8 million from year end mainly due to Mattel's normal seasonal dating terms with its customers. Inventory balances decreased $65.9 million from September 30, 1998, primarily due to lower finished goods inventories resulting from Mattel's shift to just-in-time production and shipping programs, partially offset by higher Learning Company inventory. Prepaid expenses and other current assets increased $94.1 21 million compared to the third quarter of 1998, and $99.4 million compared to year end 1998 as a result of higher prepaid royalties and software development costs. Property, plant and equipment, net decreased $35.2 million from year end mainly due to asset writedowns related to the 1999 restructuring. Intangibles decreased $90.3 million compared to the 1998 third quarter end, mainly due to amortization. Short-term borrowings increased $28.2 million compared to the 1998 third quarter end and increased $746.4 million compared to the 1998 year end mainly due to the financing of seasonal working capital requirements. Current portion of long-term liabilities increased $119.5 million over the 1998 third quarter end, primarily due to the reclassification of $100.0 million of 6-3/4% senior notes and $30.0 million of medium-term notes from long-term to current portion. Current portion of long-term liabilities increased $99.6 million compared to the 1998 year end primarily due to the reclassification of $100.0 million of 6-3/4% senior notes from long-term to current portion. Seasonal financing needs for the next twelve months are expected to be satisfied through internally generated cash, issuance of commercial paper, issuance of long-term debt, and use of Mattel's various short-term bank lines of credit. A summary of Mattel's capitalization is as follows:
(In millions) Sept. 30, 1999 Sept. 30, 1998 Dec. 31, 1998 - ------------------------------------------------------------------------------------------ Medium-term notes $ 540.5 17% $ 520.5 15% $ 540.5 16% Senior notes 501.0 15 591.0 17 601.0 17 Other long-term debt obligations 42.9 1 43.1 1 43.0 1 - ------------------------------------------------------------------------------------------ Total long-term debt 1,084.4 33 1,154.6 33 1,184.5 34 Other long-term liabilities 159.5 5 143.4 4 149.1 4 Stockholders' equity 2,005.2 62 2,223.8 63 2,170.8 62 - ------------------------------------------------------------------------------------------ $3,249.1 100% $3,521.8 100% $3,504.4 100% ==========================================================================================
Total long-term debt as a percentage of total capitalization remained flat at 33% compared to the 1998 third quarter end. Medium-term notes increased by $20.0 million compared to the 1998 third quarter end due to issuance of $50.0 million in notes, partially offset by the reclassification of $30.0 million to current portion of long-term liabilities. Senior notes decreased $90.0 million compared to the 1998 third quarter end and $100.0 million compared to the 1998 year end, primarily due to the reclassification of $100.0 million of 6-3/4% senior notes to current portion of long-term liabilities. Mattel expects to satisfy its future long-term capital needs through the retention of corporate earnings and the issuance of long-term debt instruments. Stockholders' equity decreased $218.6 million since September 30, 1998 primarily due to treasury stock purchases, dividend declarations on common and preferred stock and the unfavorable effect of currency translation adjustments, partially offset by cumulative earnings and cash received from exercise of employee stock options. Stockholders' equity declined $165.6 million from year end 1998 mainly due to dividend declarations on common and preferred stock, Mattel's net loss position due to restructuring and other non-recurring charges, treasury stock purchases and unfavorable effect of currency translation adjustments, partially offset by cash received from exercise of employee stock options. 22 Business Combination Pursuant to an Agreement and Plan of Merger, dated as of December 13, 1998, a merger was consummated between Mattel and Learning Company on May 13, 1999. The stock-for-stock transaction was approved by the stockholders of each company, after which Learning Company was merged with and into Mattel, with Mattel being the surviving corporation. Each share of Learning Company Series A Preferred Stock was converted into 20 shares of Learning Company common stock immediately prior to the consummation of the merger. Pursuant to the merger agreement, each outstanding share of Learning Company common stock was 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., remains outstanding, but upon consummation of the merger became exchangeable for 1.2 shares of Mattel common stock. Restructuring and Other Charges During the second quarter of 1999, Mattel completed its merger with Learning Company and finalized a previously announced plan of restructuring and integration. These actions, along with other one-time events, resulted in a non-recurring pre-tax charge against operations of $345.0 million, $267.0 million after tax or $0.65 per share. Of the total pre-tax charge, approximately $141 million is expected to be spent in 1999 and $105 million in 2000 in connection with the restructuring and integration. Total cash outlay of approximately $276 million will be funded from existing cash balances and internally generated cash flows from operations. The restructuring and integration plan, expected to be substantially complete by June 2000, provides for the consolidation and realignment of Mattel's operations. The plan is aimed at leveraging global resources in areas of manufacturing, marketing and distribution, eliminating duplicative functions worldwide and achieving improved operating efficiencies. The plan is designed to reduce product costs and overhead spending which is expected to result in cost savings of approximately $50 million in 1999 and at least $400 million over the following three years. These savings are net of anticipated incremental integration related spending of approximately $14 million. This incremental spending includes approximately $4 million for capital investment at existing manufacturing facilities as well as network consolidation, and charges for the relocation of employees and movement of equipment, employee transition/training, and manufacturing start-up costs. 23 The following are the major restructuring and integration initiatives: . Consolidation of the Infant and Preschool businesses; . Consolidation of the domestic and international back-office functions; . Consolidation of direct marketing operations; . Realignment of the North American sales force; . Termination of various international distributor contracts; and . Closure of four higher cost manufacturing facilities. Components of the restructuring and other non-recurring charges recorded in the second quarter of 1999 and amounts incurred through September 30, 1999 are as follows:
Total Charge Balance June 30, Amount Sept. 30, (In millions) 1999 Incurred 1999 - --------------------------------------------------------------------------------------------------------------- Severance and other compensation $108 $ 23 $ 85 Distributor, license and other contract terminations 57 39 18 Writedown of assets 42 42 - Lease termination costs 22 - 22 - --------------------------------------------------------------------------------------------------------------- Total restructuring costs and asset writedowns 229 104 125 Merger-related transaction and other costs 86 73 13 Other non-recurring charges 30 12 18 - --------------------------------------------------------------------------------------------------------------- Total restructuring, asset writedowns and other charges $345 $189 $156 ===============================================================================================================
Severance and other compensation costs relate to the termination of approximately 4,100 employees around the world. Approximately 3,200 of these employees are hourly workers located in certain of Mattel's manufacturing facilities, of which approximately 2,200 were employed in the manufacturing facility in Kuala Lumpur, which ceased operations in September 1999. The remainder of the work force reductions consists of downsizing sales and marketing groups in the US, Europe and Asia-Pacific regions as well as the elimination of duplicate administrative personnel following the consolidation of back-office functions, the majority of which are in Europe. As of September 30, 1999, approximately $23 million had been paid to nearly 2,500 terminated employees. Cash severance payments will extend beyond the completion of the workforce reductions due to the severance payment options available to affected employees. Mattel terminated its sponsorship agreements related to certain attractions for a total cost of $37.5 million, inclusive of the writeoff of related capitalized costs. The cash portion of this charge was paid as of July 1999. Mattel also recognized a $19.5 million charge, mainly related to settlements for termination of certain foreign distributor agreements in conjunction with the realignment of its sales and distribution network. Mattel's restructuring plan resulted in the impairment of certain long-lived assets related to the operations being closed. The sum of the undiscounted future cash flows of these assets was not sufficient to cover the carrying amount of these assets. As a result, these long-lived assets were written down to fair market value and will be depreciated over their remaining useful lives. Fair value of the impaired assets was determined by either third-party 24 appraisals or past experience in disposing of similar assets. Buildings and, to the extent possible, equipment will be sold while the remainder of the impaired assets will be abandoned when taken out of service. Nearly all of the revenue- generating activities related to these assets will continue as a result of more effective utilization of other assets. A significant portion of the fixed asset writedowns is concentrated in the Operations and Learning Company segments. Two of the four manufacturing facilities ceased production during the third quarter of 1999. In addition, other asset writeoffs include approximately $10 million of goodwill related to a recently acquired software business, which was closed following the merger with Learning Company. Lease termination costs include penalties imposed upon canceling existing leases and future obligations under long-term rental agreements at facilities being vacated following the merger and realignment. Merger-related transaction costs consist of investment banking fees, legal, accounting and printing costs, registration fees and other costs recognized in connection with the merger. Also included in this amount are the contractual change of control payments arising from the merger. The majority of all merger- related transaction costs were paid during the second quarter of 1999. Other non-recurring charges include an additional $16.0 million related to the October 1998 recall of Mattel's Power Wheel(R) vehicles and $14.0 million for environmental remediation costs related to a manufacturing facility on a leased property in Beaverton, Oregon, based on the completion and approval of the remediation plan and feasibility study. Foreign Currency Risk Mattel's results of operations and cash flows can be impacted by exchange rate fluctuations. To limit the exposure associated with exchange rate movements, Mattel enters into foreign currency forward exchange contracts primarily to hedge its purchase of inventory, sales and other intercompany transactions denominated in foreign currencies. Mattel's results of operations can also be affected by the translation of foreign revenues and earnings into US dollars. Market risk exposures exist with respect to the settlement of foreign currency transactions during the year because currency fluctuations cannot be predicted with certainty. Mattel seeks to mitigate its exposure to market risk by monitoring its currency exchange exposure for the year and partially or fully hedging such exposure. In addition, Mattel manages its exposure through the selection of currencies used for foreign borrowings and intercompany invoicing. Mattel does not trade in financial instruments for speculative purposes. 25 Year 2000 Update Many currently installed computer systems and software products, including several used by Mattel, were originally coded to accept only two-digit, rather than four-digit entries in the date code field used to define the applicable year. In such instances, the first two characters were assumed to be "19". Beginning in the year 2000 or perhaps earlier if referencing a date in the year 2000, such computer systems and software products could incorrectly recognize a date that uses only "00", as the year 1900, rather than the year 2000. This could result in miscalculations or system failures. To address the year 2000 issue, in early 1998 Mattel established a project team and initiated a comprehensive plan to assess, remediate and test Mattel's internal systems, hardware and processes, including key operational, manufacturing and financial systems. Learning Company, acquired by Mattel in May 1999, followed its own year 2000 readiness plan prior to the merger. Since the date of merger, Mattel has evaluated Learning Company's year 2000 readiness. Learning Company's status of preparation and progress are now essentially the same as Mattel's. Mattel's management and board of directors are regularly informed about the year 2000 issue both generally and as it may affect Mattel's business. Mattel's internal year 2000 project team oversees all aspects of implementing the readiness plan. The team is comprised of staff members from the information systems department having the requisite knowledge of Mattel's computer systems, including all technical aspects of the systems. Key user group designees from business areas are included on each system team, which is guided by a central project team. Mattel has not engaged outside consultants, technicians or other external resources to assist in formulating and implementing the program. Mattel's plan has adhered to a multi-step process comprised of five distinct phases of activity: (1) awareness; (2) inventory and risk assessment; (3) code and system modification; (4) testing; and (5) business interruption and contingency planning. Under the first two phases of the plan, Mattel has inventoried and evaluated all operational, manufacturing and financial systems. This inventory included all software systems, computer hardware, facilities, and production equipment containing or depending upon a computer chip. As a result of such evaluation, Mattel established detailed plans and action steps required to address all aspects of the year 2000 issue, including code and system modifications (phase 3). Mattel completed the awareness, inventory and code change phases of the plan as scheduled. Critical system verification and testing (phase 4) was completed prior to September 30, 1999. 26 Contingency planning is being done on a worldwide basis by all business units. Each business unit is concentrating on factors external to Mattel which may adversely impact its ability to conduct operations. Specifically, for those locations where a high likelihood of a material failure exists, Mattel has established revised procedures for managing operations, including identification of alternate suppliers and vendors whose systems are year 2000 compliant. Mattel's contingency plans (phase 5) have two key parts. The first part, which was completed in mid-year 1999, was to assess possible risks of business interruption that could affect various areas within Mattel. The second part, expected to be completed early in the fourth quarter, is to develop a business resumption plan in each location. Mattel initiated formal communications with each of its significant suppliers and customers to determine the extent to which they are addressing the year 2000 issue and the effect on its business should those parties fail to adequately address the issue. Mattel has received responses from the majority of its suppliers and customers. These responses have been positive and support the overall initiatives toward achieving year 2000 compliance. Mattel continues to follow-up with those other customers and suppliers failing to reply to the initial inquiry. However, such customers and suppliers do not represent a significant part of Mattel's operations. All Mattel software products currently available for sale to consumers and under development are year 2000 compliant. Mattel software products manufactured by third-parties under licensing agreements have been certified as year 2000 compliant by such manufacturers. Mattel sells software products primarily for use in homes and schools, and has sold products over the last few years that have since been discontinued but may still be used by consumers. Several discontinued products sold by Learning Company in the past may not operate as intended on certain computers due to the year 2000 issue. As of September 30, 1999, Mattel has spent a total of approximately $13 million in connection with addressing the year 2000 issue. Any additional charges are expected to be minimal. These costs are largely due to the use of internal resources dedicated to achieving year 2000 compliance, and are charged to expense as they are incurred. Work on the year 2000 issue has not delayed any internal projects that would have a material effect on Mattel's consolidated financial position or results of operation. All costs of addressing the year 2000 issue have been and will continue to be funded from internally generated cash. Mattel has dedicated resources to remediate, test and otherwise prepare all aspects of its internal systems. Steps were taken to verify that all key third- party suppliers and customers were taking measures to ensure their own readiness and timely implementation. However, if all year 2000 issues have not been properly identified and assessed there can be no assurance that the year 2000 issue will not materially adversely affect Mattel's results of operations, liquidity and financial position or adversely affect Mattel's relationships with customers, vendors or others. For example, failure to achieve year 2000 readiness for Mattel's internal systems could delay its ability to manufacture and ship products or disrupt customer service and technical support facilities. Mattel also relies on third parties such as manufacturing suppliers and vendors and large retail customers. If these or other third parties 27 experience year 2000 failures or malfunctions there could be a material adverse affect on Mattel's ability to conduct ongoing operations. Additionally, Mattel could incur increased costs, lost sales or other negative consequences, including potential litigation, as a result of customer dissatisfaction with products that are not year 2000 compliant. The above discussion regarding costs, risks and estimated completion dates for the year 2000 issue is based on Mattel's best estimates given information that was available on September 30, 1999, and is subject to change. Actual results could differ from these estimates. 28 PART II -- OTHER INFORMATION Item 1. Legal Proceedings Following Mattel's announcement on October 4, 1999, that it expected an earnings shortfall at its Learning Company division in the third quarter of 1999, several of Mattel's stockholders filed purported class action complaints in the United States District Courts for the Central District of California, the Southern District of New York, and the District of Massachusetts, naming Mattel and certain of its officers and directors as defendants. The complaints generally allege, among other things, that defendants made false or misleading statements that artificially inflated the price of Mattel common stock by overstating the revenues and net income of Mattel and Learning Company and by falsely representing that the Learning Company merger would be immediately accretive to Mattel's 1999 and 2000 financial results. In addition, a Mattel stockholder filed a derivative complaint on behalf and for the benefit of Mattel in the Superior Court of the State of California, County of Los Angeles. The complaint alleges that Mattel's directors breached their fiduciary duties, wasted corporate assets and grossly mismanaged Mattel in connection with Mattel's merger with Learning Company and seeks both monetary and injunctive relief. Mattel believes the lawsuits are without merit and intends to defend them vigorously. Item 2. Changes in Securities and Use of Proceeds (c) On June 16 1999, Mattel issued a notice to holders of its Series C Mandatorily Convertible Redeemable Preferred Stock and to the holders of the related Depository Shares informing them of Mattel's optional redemption of these securities on July 1, 1999. On July 1, 1999, each share of Series C Preferred Stock was redeemed in exchange for 10.015914 shares of Mattel common stock, and each Depository Share was redeemed in exchange for 0.400637 shares of Mattel common stock. A total of 7,731,483 shares of Mattel common stock were issued as a result of the redemption. Such shares were issued under Section 3(a)(9) of the Securities Act of 1933, as amended. 29 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -------- 11.0 Computation of Income (Loss) per Common and Common Equivalent Share 27.0 Financial Data Schedule (EDGAR filing only) 99.0 Severance Agreement dated April 5, 1999 between Mattel and Bruce L. Stein (b) Reports on Form 8-K ------------------- Mattel filed the following Current Report on Form 8-K during the quarterly period ended September 30, 1999: Date of Report Items Reported Financial Statements Filed ------------------------------------------------------------------ July 22, 1999 5,7 None 30 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTEL, INC. --------------------------------------- (Registrant) Date: As of November 11, 1999 By: /s/ Kevin M. Farr ----------------------- --------------------------------------- Kevin M. Farr Senior Vice President and Corporate Controller (Chief Accounting Officer and Duly Authorized Officer of the Registrant) 31 EX-11 2 COMPUTATION OF INCOME MATTEL, INC. AND SUBSIDIARIES COMPUTATION OF INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (in thousands, except per share amounts)
For The For The Three Months Ended Nine Months Ended ------------------------- ----------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, BASIC 1999 1998 1999 1998 - ----- ----------- ----------- -------------- ----------- Net income (loss) $ 135,333 $ 168,734 $ (63,952) $ 117,355 Less: Dividends on convertible preferred stock - (1,990) (3,980) (5,970) ----------- ----------- -------------- ----------- Net income (loss) applicable to common shares $ 135,333 $ 166,744 $ (67,932) $ 111,385 =========== =========== ============== =========== Applicable Shares for Computation of Income (Loss) per Share: Weighted average common shares outstanding 425,148 399,218 410,316 387,020 =========== =========== ============== =========== Basic Income (Loss) Per Common Share: Net income (loss) per common share $ 0.32 $ 0.42 $ (0.17) $ 0.29 =========== =========== ============== =========== DILUTED - ------- Net income (loss) $ 135,333 $ 168,734 $ (63,952) $ 117,355 Less: Dividends on convertible preferred stock - - (3,980) (5,970) ----------- ----------- -------------- ----------- Net income (loss) applicable to common shares $ 135,333 $ 168,734 $ (67,932) $ 111,385 =========== =========== ============== =========== Applicable Shares for Computation of Income (Loss) per Share: Weighted average common shares outstanding 425,148 399,218 410,316 387,020 Weighted average common equivalent shares arising from: Dilutive stock options 3,711 8,747 - 9,693 Special warrants - 463 - 4,238 Assumed conversion of Series A convertible preferred stock - 18,000 - 18,000 Assumed conversion of Series C convertible preferred stock - 7,731 - - Stock subscription warrants 595 764 - 777 Nonvested stock - 200 - 142 ----------- ----------- -------------- ----------- Weighted average number of common and common equivalent shares 429,455 435,123 410,316 419,870 =========== =========== ============== =========== Diluted Income (Loss) Per Common Share: Net Income (loss) per common share $ 0.32 $ 0.39 $ (0.17) $ 0.27 =========== =========== ============== ===========
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MATTEL, INC.'S BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 92,714 0 2,176,864 175,996 742,704 3,307,433 1,187,713 459,772 5,735,857 2,486,766 1,083,997 0 0 432,766 1,572,396 5,735,857 3,744,360 3,744,360 1,926,076 1,926,076 1,791,469 0 102,463 (75,648) (11,696) (63,952) 0 0 0 (63,952) (0.17) (0.17)
EX-99 4 SEVERANCE AGREEMENT DATED APRIL 5, 1999 SEVERANCE AGREEMENT ------------------- 1. PARTIES: The parties to this Severance Agreement - (herein ------- "Agreement") are BRUCE L. STEIN ("Stein") and MATTEL, INC. ("Mattel"). 2. RECITALS: This Agreement is made with reference to the following -------- facts: 2.1 Stein has been employed by Mattel, Inc. as President, Mattel Worldwide and Chief Operating Officer pursuant to an Employment Agreement dated as of December 20, 1996 (herein "Employment Agreement"). 2.2 Mattel and Stein have agreed that Stein will immediately resign his positions as President, Mattel Worldwide and Chief Operations Officer and as a member of the Board of Directors of Mattel, Inc. and its subsidiary corporations, and will terminate his employment with Mattel effective April 30, 1999. In this connection Stein will execute the letter of resignation, a copy of which is Exhibit "A" hereto. 2.3 Certain issues have arisen with respect to Stein's right to receive certain payments and other benefits upon the termination of his employment pursuant to the provisions of his Employment Agreement. -1- 2.4 It is the intention of the parties hereto to settle and dispose of, fully and completely, any and all claims, demands and cause or causes of action each may have against the other, heretofore or hereafter arising out of, connected with or incidental to the dealings between the parties hereto prior to the effective date hereof, including, without limitation on the generality of the foregoing, any and all claims, demands and cause or causes of action arising out of the employment or termination of Stein's employment with Mattel, or the interpretation or application of any provision of his Employment Agreement, or with respect to any reason whatsoever, including any matters not related to those claims. 3. PAYMENTS: On or before May 1, 1999, Mattel shall pay or cause to be -------- paid to Stein, pursuant to the provisions of Section 5(d) et seq. of the -- --- Employment Agreement, the amount of $5,076,747.00. 4. OTHER BENEFITS UPON TERMINATION: ------------------------------- 4.1 Effective April 30, 1999 Mattel will forgive the principal amount and accrued unpaid interest on Stein's outstanding loan. 4.2 Mattel shall continue to provide medical, dental, prescription drug and vision care group insurance as presently provided to Stein and his dependants for a -2- period ending April 30, 2002, or the date upon which Stein accepts other full time employment, whichever shall be the first to occur. 4.3 Stein shall be entitled to continue to hold and exercise stock options previously granted to him as provided for in Mattel's stock option plans, as modified by the provisions of Exhibit "B" hereto. In the event that any previously granted stock options shall be repriced prior to the expiration date for any Mattel senior executives, options granted to Stein shall be similarly repriced. 4.4 Mattel agrees to transfer to Stein the 1997 Series 5 BMW currently provided to Stein, for business purposes, effective May 1, 1999. Thereafter he will be responsible for all insurance, fuel, maintenance, repairs and any other costs for that car. Upon execution of this agreement Stein agrees to return to Mattel all credit cards in his possession which were provided to him by Mattel for his use in operating the car, or for other purposes. Mattel also agrees to transfer the PC computer currently provided to Stein for business purposes. Thereafter he will be responsible for costs of maintenance and all modem connections. Pursuant to the provisions of Section 5 et seq. of -- --- the employment agreement, Stein shall not be required to reimburse Mattel for either of the transfers. -3- 5. COSTS AND FEES: Mattel shall promptly pay to Sitrick & Co. for -------------- assisting Stein and Mattel in preparing press releases the sum of Five Thousand Dollars ($5,000.00) and to Buchalter, Nemer, Fields & Younger the sum of Twenty- Five Thousand Dollars ($25,000.00) for legal services rendered to Stein with respect to this agreement. Except as otherwise provided herein each party hereto shall bear their own costs and attorney's fees. 6. RELEASE OF CLAIMS: In consideration of the payments and promises ----------------- provided for herein, and except for rights created by this agreement, and except for any indemnification rights Stein may have as an officer and/or director of Mattel under Delaware law, the Mattel Articles of Incorporation or By-laws, or any Directors and Officers liability insurance, Stein hereby releases, remises and forever discharges Mattel, its affiliates, subsidiaries, subsidiary entitles and the owners, stockholders, predecessors, successors, assigns, employees, officers, directors, counsel, and agents and Mattel hereby releases, remises and forever discharges Stein from any and all claims, demands, and cause or causes of action heretofore arising out of, connected with or incidental to the dealings between the parties hereto prior to the effective date hereof, including, without limitation on the generality of the foregoing, any and all claims, demands and cause or causes of action arising out of the employment, or termination of employment of Stein. This includes a release of any rights or claims Stein may have under Title VII of the Civil Rights Act of 1964, as -4- amended by the Civil Rights Act of 1991, which prohibits discrimination in employment based on race, color, national origin, religion or sex; the California Fair Employment and Housing Act, which prohibits discrimination based on race, color, national origin, ancestry, physical handicap, medical condition, marital status, sex or age; the Age Discrimination in Employment Act which prohibits age discrimination over the age of forty (40); the Americans With Disability Act, which prohibits discrimination based on physical handicap; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; or any other federal, state or local laws or regulations prohibiting employment discrimination. 6.1 Stein shall have a period of twenty-one (21) days to review and consider this Agreement before signing it. 6.2 Stein may revoke this Agreement within seven (7) days after he signs it by delivering a written notice of revocation to Ned Mansour at Mattel's headquarters so that it is received by him not later than the close of business on that day. In the event of such revocation it shall not be effective and Stein shall not receive the payments and other benefits provided for herein. -5- 6.3 This Agreement does not waive or release any rights or claims which Stein has under the Age Discrimination in Employment Act which arise after the execution of this Agreement. 7. REPRESENTATIONS AND WARRANTIES: Each of the parties to this Agreement ------------------------------ represents, warrants, and agrees as follows: 7.1 Each party has received independent legal advice from its attorneys, with respect to the advisability of making the settlement provided herein, with respect to the advisability of executing this Agreement, and with respect to the meaning of California Civil Code Section 1542. By executing this Agreement, Stein acknowledges that he has read it, discussed it with his attorneys, and has executed it in reliance upon the advice of his attorneys with respect to each of these matters. 7.2 No party (nor any officer, agent, employee, representative, or attorneys of or for any party), has made any statement or representation to any other party regarding any fact relied upon in entering into this Agreement, and each party does not rely upon any statement, representation or promise of any other party (or of any officer, agent, employee, representative, or attorney for the other party), in executing this Agreement, or in making the settlement provided for herein, except as expressly stated in this Agreement. -6- 7.3 Each party to this Agreement has made such investigation of the facts pertaining to this settlement and this Agreement and of all the matters pertaining thereto as it deems necessary. 7.4 Each party executing this Agreement, or in the case of Mattel, a responsible officer thereof, has read this Agreement and understands the contents hereof. The officer executing this Agreement on behalf of Mattel is empowered to do so and thereby binds Mattel. 7.5 Neither party has heretofore exercised its sole power to assign, transfer, or grant, or purport to assign, transfer, or grant, any of the claims, demands, and cause or causes of action disposed of by this Agreement. 7.6 Each term of this Agreement is contractual and not merely a recital. 7.7 Stein and Mattel are aware that they may hereafter discover claims or facts in addition to or different from those they now know or believe to be true with respect to the matters related herein. Nevertheless, and except as herein provided, it is their intention to fully, finally and forever settle and release all claims -7- relative thereto which do now exist, or heretofore have existed between Mattel and Stein. In furtherance of such intention, the releases given herein shall be and remain in effect as full and complete releases of all such matters, notwithstanding the discovery of existence of any additional or different claims or facts relative thereto. 7.8 It is expressly understood and agreed by Stein that the sums specified to be paid by or on behalf of Mattel to him, pursuant to paragraph 3 above, as well as the other benefits provided for in paragraph 4 et seq., shall -- --- be in lieu of any and all amounts of which Stein is now or may become entitled to from Mattel for any and all claims released, as described in paragraph 6 of this Agreement. 7.9 Stein agrees not to initiate, or cause to be initiated against Mattel, its affiliates, subsidiaries and the shareholders, directors, officers and employees, any compliance review, suit, action, appeal, investigation or proceeding of any kind, or participate in same, individually or as a representative or member of a class, unless compelled by law, under any contract (express or implied), tort, law, or regulation (federal, state or local), pertaining in any way whatsoever to the matters herein released, nor shall he be entitled to receive any payment from any such proceeding. 7.10 The parties hereto agree that each and every provision of Part 10 "Confidential Information," contained in the Employment Agreement, including, ------------------------ -8- without limitation, the non-disclosure provisions of the Employee Confidential Information and Inventions agreement, previously executed by Stein, shall by this reference, be incorporated in this agreement. Any material violation of this provision by Stein which causes adverse economic results to Mattel shall disqualify him from exercising any of the stock options he may hold under the Premium Price Stock Option Plan as modified by the provisions of Exhibit "B" hereto. 7.11 Except as to disclosures required by law, or otherwise made by Mattel, Stein agrees not to disclose the terms of this Agreement to anyone other than the attorneys involved in this matter, his accountants or tax preparers or, in the case of Stein, his immediate family; and shall forthwith instruct such attorneys, accountants or tax preparers and his immediate family not to disclose the terms and conditions of this Agreement to anyone. Stein acknowledges and agrees that any disclosure of information contrary to the terms of this Section would cause Mattel injury and damage. Any material violation of this provision by Stein which causes adverse economic results to Mattel shall disqualify him from exercising any of the stock options he may hold under the Premium Price Stock Option Plan as modified by the provisions of Exhibit "B" hereto. 7.12 Stein agrees that he will refrain from making any statements about Mattel or its senior executives which would disparage, or reflect unfavorably upon the -9- image or reputation of Mattel or any such senior executives. Mattel agrees to refrain from making any statements about Stein which would disparage, or reflect unfavorably upon the image or reputation of Stein. 7.13 Stein agrees that until April 30, 1999 he will perform on a non- exclusive basis such services for Mattel in Los Angeles, California, and consistent with his position at Mattel, as may be directed in writing by Jill Barad. 7.14 Stein agrees that he shall not seek employment with Mattel, its affiliates, or subsidiaries, which are known to him, at any time in the future, and that such parties have no obligation to employ, hire, rehire, or to consider him for hire. Stein's forbearance from seeking employment is purely contractual and voluntary, and does not constitute discrimination or retaliation in any respect. 7.15 Stein agrees that for a period ending on April 30, 2000 he will not directly or indirectly, recruit or solicit any of Mattel's employees at the level of vice-president or above, to accept employment with any other employer. Any material violation of this provision by Stein which causes adverse economic results to Mattel shall disqualify him from exercising any of the stock options he may hold under the Premium Price Stock Option Plan as modified by the provisions of Exhibit "B" hereto. -10- 7.16 The parties will execute all such further and additional documents as shall be reasonable, convenient, necessary or desirable to carry out the provisions of this Agreement. 7.17 Mattel agrees that Ned Mansour (herein "Mansour") will provide to Stein, at his request, an appropriate letter of recommendation, in the form of Exhibit "C" attached hereto. Stein agrees to request that all prospective employers direct their requests for reference information to Mansour. Mattel agrees that requests for reference information concerning Stein which it receives shall be directed to Mansour. The information which will be provided to prospective employers will be substantially identical to that contained in Exhibit "B". 8. SETTLEMENT: This Agreement affects the settlement of claims which are ---------- denied and contested, and nothing contained herein shall be construed as an admission by any party hereto of any liability of any kind to any other party. Each of the parties hereto denies any liability in connection with any claim and intends merely to avoid litigation and buy its peace. -11- 9. MISCELLANEOUS: ------------- 9.1 This Agreement shall be deemed to have been executed and delivered within the State of California, and the rights and obligations of the parties hereto shall be construed and enforced in accordance with, and governed by, the laws of the State of California. 9.2 This Agreement is the entire Agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral and written agreements and discussions. This Agreement may be amended only by an agreement in writing signed by all parties. 9.3 This Agreement is binding upon and shall inure to the benefit of the parties hereto, their respective agents, employees, representatives, officers, directors, divisions, subsidiaries, affiliates, heirs, predecessors, successors in interest and shareholders. 9.4 Each party has cooperated in the drafting and preparation of this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be construed against any party. -12- 9.5 Should any provisions of this Agreement be declared or determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and said illegal or invalid part, term or provision shall be deemed not to be a part of this Agreement. 9.6 Mattel and Stein each specifically waive the benefit of the provisions of Section 1542 of the Civil Code of the State of California, as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." 9.7 The parties hereto agree that each and every provision of Part 8 "Arbitration of Disputes," contained in the Employment Agreement, shall by this ----------------------- reference, be incorporated in this Agreement and shall apply to any issue, controversy or dispute which may arise with respect to the interpretation or application of this Agreement. 9.8 All notices and other communications shall be in writing; shall be delivered by hand or mailed by registered or certified mail, return receipt requested, -13- postage prepaid, to the other party; and shall be deemed delivered upon actual receipt; and shall be addressed as follows: To Mattel: Ned Mansour President Corporate Operations and General Counsel Mattel Inc. 333 Continental Blvd. El Segundo, California 90245 To Stein: Mr. Bruce L. Stein or to such other address as either party, in writing shall have furnished to the other. 9.9 This Agreement consisting of 14 pages is made and entered into on and as of April 5, 1999 in Los Angeles County, California and is effective as of this date. April 5, 1999 /s/ Bruce L. Stein - ------------------- -------------------------------------- Date BRUCE STEIN MATTEL, INC. April 7, 1999 By /s/ Ned Mansour - ------------------- ----------------------------------- Date Ned Mansour Its President --------------------- -14- EXHIBIT A March 15, 1999 Ms. Jill Barad Chairman and Chief Executive Officer Mattel, Inc. 333 Continental Boulevard El Segundo, California 90245-5012 Dear Ms. Barad: With this letter I am resigning my positions as President, Mattel Worldwide and Chief Operating Officer and as a member of the Board of Directors of Mattel, Inc., and its subsidiary corporations, effective immediately. Pursuant to the terms of my Severance Agreement with Mattel, Inc., I shall remain an employee of Mattel, Inc. until April 30, 1999 at which time my employment shall terminate. From the date of this letter to April 30, 1999 I will be available to perform, on a non-exclusive basis, those services for Mattel, Inc. in Los Angeles, California which you may direct me to perform, in writing, and which are consistent with my position at Mattel. Very truly yours, Bruce L. Stein -15- EXHIBIT B Non-Qualified Stock Options --------------------------- Non-qualified stock options shall become immediately exercisable. Executive shall have until July 30, 1999 to exercise all non-qualified stock options.
- ----------------------------------------------------------------------------- Grant Date # Shares Option Price* # Exercisable - ----------------------------------------------------------------------------- 8/8/96 400,000 $26.125 400,000 2/6/97 150,000 $25.750 150,000 2/6/97 150,000 $25.750 150,000 - -----------------------------------------------------------------------------
Premium Price Stock Option Plan ------------------------------- Prorata vesting will continue through April 30, 1999.
- ----------------------------------------------------------------------------- Grant Date # Shares Option Price* # Exercisable - ----------------------------------------------------------------------------- 11/6/97 721,707 $42.31 360,853 11/6/97 711,312 $44.87 355,656 - -----------------------------------------------------------------------------
The vesting date will be 11/6/00. Stein may continue to exercise them for 2 additional years through 11/6/02. *Subject to repricing as provided for in this Agreement. -16- EXHIBIT C To Whom It May Concern: The purpose of this letter is to verify the employment relationship between Bruce Stein and Mattel, Inc., and to confirm the level of excellence with which Mr. Stein carried out his duties at Mattel. Mr. Stein joined Mattel, Inc. as President - Worldwide in August 1996, and in 1997, was promoted to President and Chief Operating Officer of Mattel Worldwide. As President and COO, Mr. Stein directed and managed all of Mattel's product lines, established vital long-term marketing relationships and supervised Mattel's world-wide marketing efforts. Mattel has benefited significantly from Stein's exceptional leadership, his strategic marketing skills and his general management experience. We would welcome the opportunity to work with him again in the future. Please feel free to contact the undersigned with any questions you may have concerning Mr. Stein's employment with Mattel. Thank you. Very truly yours, ____________________________________ Ned Mansour, President - Corporate Administration Mattel, Inc. -----END PRIVACY-ENHANCED MESSAGE-----