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 June 30, 1998 ------------- 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, None if changed since last report) -------------- 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 July 17, 1998: Common Stock - $1 par value -- 292,654,006 shares
<TABLE> PART I -- FINANCIAL INFORMATION ------------------------------- MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <CAPTION> June 30, June 30, Dec. 31, (In thousands) 1998 1997 1997 - -------------- ----------- ----------- ----------- ASSETS <S> <C> <C> <C> Current Assets Cash $ 151,949 $ 58,989 $ 694,947 Accounts receivable, net 1,249,205 1,315,815 1,091,416 Inventories 627,534 552,463 428,844 Prepaid expenses and other current assets 255,288 194,962 246,529 ----------- ----------- ----------- Total current assets 2,283,976 2,122,229 2,461,736 ----------- ----------- ----------- Property, Plant and Equipment Land 25,919 35,221 29,556 Buildings 196,249 215,446 198,396 Machinery and equipment 473,535 458,401 453,978 Capitalized leases 23,362 25,374 24,625 Leasehold improvements 72,391 74,721 68,179 ----------- ----------- ----------- 791,456 809,163 774,734 Less: accumulated depreciation 354,735 344,792 336,946 ----------- ----------- ----------- 436,721 464,371 437,788 Tools, dies and molds, net 170,938 153,980 163,809 ----------- ----------- ----------- Property, plant and equipment, net 607,659 618,351 601,597 ----------- ----------- ----------- Other Noncurrent Assets Intangible assets, net 585,407 590,145 542,759 Sundry assets 199,910 236,697 197,699 ----------- ----------- ----------- $ 3,676,952 $ 3,567,422 $ 3,803,791 =========== =========== =========== <FN> See accompanying notes to consolidated financial information. </TABLE> 2
<TABLE> MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) <CAPTION> June 30, June 30, Dec. 31, (In thousands, except share data) 1998 1997 1997 - --------------------------------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> <C> Current Liabilities Short-term borrowings $ 191,454 $ 164,991 $ 17,468 Current portion of long-term liabilities 12,341 231,708 13,659 Accounts payable 238,982 216,220 310,117 Accrued liabilities 486,546 523,018 629,445 Income taxes payable 147,101 120,033 202,735 ----------- ----------- ----------- Total current liabilities 1,076,424 1,255,970 1,173,424 ----------- ----------- ----------- Long-Term Liabilities 6-3/4% Senior Notes due 2000 100,000 100,000 100,000 Medium-Term Notes 520,500 380,000 520,500 Mortgage note 43,297 43,836 43,573 Other 134,540 143,458 144,224 ----------- ----------- ----------- Total long-term liabilities 798,337 667,294 808,297 ----------- ----------- ----------- Shareholders' Equity Preferred stock, Series B $1.00 par value, $1,050.00 liquidation preference per share, 0.1 million shares authorized, issued and outstanding at June 30, 1997 - 54 - Preferred stock, Series C $1.00 par value, $125.00 liquidation preference per share, 0.8 million shares authorized, issued and outstanding 772 773 772 Common stock $1.00 par value, 1,000.0 million shares authorized at June 30, 1998 and 600.0 million shares authorized at June 30, 1997 and December 31, 1997; 300.4 million shares issued at June 30, 1998 and December 31, 1997 and 296.7 million shares issued at June 30, 1997 300,381 296,729 300,381 Additional paid-in capital 488,888 506,224 509,172 Treasury stock at cost; 7.7 million shares, 5.8 million shares and 8.8 million shares, respectively (267,293) (162,269) (285,420) Retained earnings 1,515,803 1,122,343 1,490,804 Accumulated other comprehensive (loss) (236,360) (119,696) (193,639) ----------- ----------- ----------- Total shareholders' equity 1,802,191 1,644,158 1,822,070 ----------- ----------- ----------- $ 3,676,952 $ 3,567,422 $ 3,803,791 =========== =========== =========== <FN> See accompanying notes to consolidated financial information. </TABLE> 3
<TABLE> MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <CAPTION> For the For the Three Months Ended Six Months Ended ---------------------- ---------------------- June 30, June 30, June 30, June 30, (In thousands, except per share amounts) 1998 1997 1998 1997 - ---------------------------------------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net Sales $ 861,526 $ 972,656 $1,566,690 $1,666,176 Cost of sales 456,778 513,819 838,024 884,528 ---------- ---------- ---------- ---------- Gross Profit 404,748 458,837 728,666 781,648 Advertising and promotion expenses 109,875 131,713 207,956 234,339 Other selling and administrative expenses 190,689 192,707 374,480 377,993 Integration and restructuring costs - - - 275,000 Interest expense 15,625 18,514 32,017 38,150 Other expense, net 3,942 7,959 11,840 15,841 ---------- ---------- ---------- ---------- Income (Loss) Before Income Taxes 84,617 107,944 102,373 (159,675) Provision (benefit) for income taxes 24,233 32,310 29,320 (30,685) ---------- ---------- ---------- ---------- Net Income (Loss) 60,384 75,634 73,053 (128,990) Less: preferred stock dividend requirements 1,990 2,837 3,980 5,677 ---------- ---------- ---------- ---------- Net Income (Loss) Applicable to Common Shares $ 58,394 $ 72,797 $ 69,073 $ (134,667) ========== ========== ========== ========== Basic Income (Loss) Per Common Share - ------------------------------------ Net income (loss) $ 0.20 $ 0.25 $ 0.24 $ (0.46) ========== ========== ========== ========== Average number of common shares 293,433 291,737 293,242 290,069 ========== ========== ========== ========== Diluted Income (Loss) Per Common Share - -------------------------------------- Net income (loss) $ 0.20 $ 0.25 $ 0.23 $ (0.46) ========== ========== ========== ========== Average number of common and common equivalent shares 297,720 296,609 297,943 290,069 ========== ========== ========== ========== Dividends Declared Per Common Share $ 0.08 $ 0.07 $ 0.15 $ 0.13 ========== ========== ========== ========== <FN> See accompanying notes to consolidated financial information. </TABLE> 4
<TABLE> MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> For the Six Months Ended ----------------------- June 30, June 30, (In thousands) 1998 1997 - -------------- ---------- ---------- <S> <C> <C> Cash Flows From Operating Activities: - ------------------------------------- Net income (loss) $ 73,053 $ (128,990) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Noncash restructuring and integration charges - 90,382 Depreciation 79,961 79,721 Amortization 16,175 17,374 Increase (decrease) from changes in net assets and liabilities: Accounts receivable (144,930) (389,743) Inventories (197,079) (125,622) Prepaid expenses and other current assets (7,384) (246) Accounts payable, accrued liabilities and income taxes payable (345,798) (177,471) Deferred compensation and other retirement plans 3,713 1,368 Deferred income taxes (2,575) (15,947) Other, net 1,272 (3,111) ---------- ---------- Net cash used in operating activities (523,592) (652,285) ---------- ---------- Cash Flows From Investing Activities: - ------------------------------------- Purchases of tools, dies and molds (57,001) (47,968) Purchases of other property, plant and equipment (68,434) (59,032) Purchase of other long-term investments (7,906) (6,955) Proceeds from sales of other property, plant and equipment 18,021 6,552 Investment in acquired businesses (11,057) (8,625) Other, net (1,231) (230) ---------- ---------- Net cash used in investing activities (127,608) (116,258) ---------- ---------- Cash Flows From Financing Activities: - ------------------------------------- Short-term borrowings, net 174,066 136,527 Issuance of Medium-Term Notes - 160,000 Payment of Medium-Term Notes (9,500) - Long-term foreign borrowings (2,904) (3,492) Tax benefit of employee stock options exercised 30,673 6,878 Exercise of stock options 63,269 18,795 Sale of treasury stock - 71,276 Purchase of treasury stock (96,099) (61,313) Dividends paid on common and preferred stock (47,128) (40,905) Other, net (447) (2,552) ---------- ---------- Net cash provided by financing activities 111,930 285,214 Effect of Exchange Rate Changes on Cash (3,728) (7,953) ---------- ---------- Decrease in Cash (542,998) (491,282) Cash at Beginning of Period 694,947 550,271 ---------- ---------- Cash at End of Period $ 151,949 $ 58,989 ========== ========== <FN> See accompanying notes to consolidated financial information. </TABLE> 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. In the opinion of management, all adjustments considered necessary for a fair presentation of Mattel, Inc. and its subsidiaries' ("the Company's") financial position and interim results as of and for the periods presented have been included. Certain amounts in the financial statements for prior periods have been reclassified to conform with the current period's presentation. Because the Company's business is seasonal, results for interim periods are not necessarily indicative of those which may be expected for a full year. The financial information included herein should be read in conjunction with the Company's consolidated financial statements and related notes in its 1997 Annual Report to Shareholders. 2. Accounts receivable are shown net of allowances for doubtful accounts of $26.4 million (June 30, 1998), $25.3 million (June 30, 1997) and $30.7 million (December 31, 1997). 3. Inventories are comprised of the following: <TABLE> <CAPTION> June 30, June 30, Dec. 31, (In thousands) 1998 1997 1997 - -------------- --------- --------- --------- <S> <C> <C> <C> Raw materials and work in progress $ 71,562 $ 89,093 $ 48,620 Finished goods 555,972 463,370 380,224 --------- --------- --------- $ 627,534 $ 552,463 $ 428,844 ========= ========= ========= </TABLE> 4. Net cash flows from operating activities include cash payments for the following: <TABLE> <CAPTION> For the Six Months Ended ------------------------ June 30, June 30, (In thousands) 1998 1997 - -------------- ---------- ----------- <S> <C> <C> Cash paid during the period for: Interest $ 34,674 $ 37,648 Income taxes 62,004 37,996 - -------------------------------------------------------------------- </TABLE> Noncash investing activities for the six months ended June 30, 1998 include the accrual of the purchase price payable in connection with the acquisition of Bluebird Toys PLC ("Bluebird"). See Note 10. 5. In the current quarter, the Board of Directors declared cash dividends of $0.08 per common share, compared to $0.07 per common share in the second quarter of 1997. 6. In the fourth quarter of 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings per Share. Accordingly, June 1997 ------------------ results have been restated to present basic and diluted income (loss) per common share. Basic income (loss) per common share is computed by dividing earnings available to common shareholders by the average number of common shares outstanding during each period. Earnings available to common shareholders represent reported net income (loss) less preferred stock dividend requirements. Diluted income (loss) per common share is computed by dividing diluted earnings available to common shareholders by the weighted average number of common and common equivalent shares outstanding during each period. Weighted average share computations assume 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 shareholders represent earnings available to common shareholders plus preferred stock dividend requirements and interest savings resulting from assumed conversions of dilutive securities. 7. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company is required to adopt SFAS 133 for its fiscal year beginning January 1, 2000. Management believes the adoption of SFAS 133 will not have a material impact on the Company's consolidated financial position or results of operations. 8. In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which ------------------------------ establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains, and losses) in a full set of general-purpose financial statements. Accordingly, comprehensive income has been reported as a separate component of shareholders' equity in the consolidated balance sheets. Total elements of comprehensive income (which is comprised of net income (loss) and currency translation adjustments) are presented in the following table in total for the quarter and year-to-date periods ended June 30: <TABLE> <CAPTION> June 30, June 30, (In thousands) 1998 1997 - -------------- --------- --------- <S> <C> <C> Quarter ended $ 47,425 $ 71,935 Year-to-date 30,332 (161,741) - ------------------------------------------------------------- </TABLE> 9. On July 9, 1998, the Company completed its previously announced acquisition of Pleasant Company and related companies ("Pleasant"), a Wisconsin-based direct marketer of books, dolls, clothing, accessories and activity products bearing the "American Girl" brand. The purchase price included net cash consideration of approximately $715 million, including costs directly related to the acquisition, subject to certain adjustments, and the assumption by the Company of certain indebtedness. Short-term borrowings were incurred by the Company in connection with this acquisition, $300.0 million of which will be repaid from the net proceeds received from the issuance of long-term debt securities under its current universal shelf registration statement. The acquisition will be accounted for using the purchase method of accounting and, accordingly, the results of operations of Pleasant will be included in the Company's consolidated financial statements from the date of acquisition. On July 15, 1998, Pleasant Rowland Frautschi, the President and founder of Pleasant, became Vice-Chairman of the Company and a member of the Company's Board of Directors. 10. On June 19, 1998, the Company acquired a controlling interest in Bluebird, a company organized in the United Kingdom, from which Mattel licenses the product designs for its POLLY POCKET and Disney Tiny Collections brands, as well as the POLLY POCKET trademarks. The aggregate purchase price, including investment advisor and other directly related expenses was approximately $80 million. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations of Bluebird have been included in the Company's consolidated financial statements since the date of acquisition. Intercompany accounts and transactions between Bluebird and the Company have been eliminated. The excess of cost over the estimated fair market value of tangible net assets acquired is being amortized on a straight-line basis over 30 years. As of June 30, 1998, the purchase price is included in accrued liabilities in the consolidated balance sheets. 11. In January 8, 1998, the Company acquired PrintPaks, Inc. ("PrintPaks"), a Portland, Oregon-based publisher of multimedia craft products. The purchase price included net cash consideration of $11.1 million. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of PrintPaks have been included in the Company's consolidated financial statements since the date of acquisition. The agreement and plan of merger also provides for future contingent consideration in the event that net sales of PrintPaks product lines reach or exceed certain levels in each of calendar years 1998, 1999, and 2000. 12. In connection with the Tyco Toys, Inc. ("Tyco") merger, the Company commenced an integration and restructuring plan and recorded a $275 million pre-tax charge against operations in March 1997. The plan consisted of consolidating certain manufacturing and distribution operations, eliminating duplicative marketing and administrative offices, terminating various distributor and licensing arrangements and abandoning certain product lines. Included in the charge was approximately $86 million for estimated severance costs related to the elimination of 2,700 positions principally associated with facilities to be closed. The remainder of the charge consisted of transaction costs related to the merger, asset write-downs and contract termination expenses. Of the total pre-tax charge, approximately $90 million represents non-cash asset write-downs. Through June 30, 1998, the total integration and restructuring expenditures and write-offs were approximately $208 million, $66 million of which related to severance payments. The plan is expected to be substantially completed in 1998. MATTEL, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- THE FOLLOWING CAUTIONARY STATEMENT IS INCLUDED IN THIS QUARTERLY REPORT PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY, WHICH INCLUDE, BUT ARE NOT LIMITED TO, SALES LEVELS, THE MATTEL AND TYCO RESTRUCTURING CHARGE, COST SAVINGS, AND PROFITABILITY, ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH STATEMENTS. THESE INCLUDE WITHOUT LIMITATION: THE COMPANY'S DEPENDENCE ON THE TIMELY DEVELOPMENT, INTRODUCTION AND CUSTOMER ACCEPTANCE OF NEW PRODUCTS; SIGNIFICANT CHANGES IN BUYING PATTERNS OF MAJOR CUSTOMERS; POSSIBLE WEAKNESSES OF INTERNATIONAL MARKETS; THE IMPACT OF COMPETITION ON REVENUES AND MARGINS; THE EFFECT OF CURRENCY FLUCTUATIONS ON REPORTABLE INCOME; UNANTICIPATED NEGATIVE RESULTS OF LITIGATION, GOVERNMENTAL PROCEEDINGS OR ENVIRONMENTAL MATTERS; AND OTHER RISKS AND UNCERTAINTIES AS MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S PUBLIC ANNOUNCEMENTS AND SEC FILINGS. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "CONTINUE," "PLANS," "INTENDS," OR OTHER SIMILAR TERMINOLOGY. Mattel, Inc. designs, manufactures, markets and distributes a broad variety of toy products on a worldwide basis. The Company's business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines and to design and develop innovative new toys and product lines. New products have limited lives, ranging from one to three years, and generally must be updated and refreshed each year. The Company plans to continue to focus on core brands that have fundamental play patterns and worldwide appeal, are sustainable, and have delivered consistent profitability and stable growth. The Company's core brands can be grouped in the following five categories: Fashion Dolls (BARBIE fashion dolls and accessories, Collector dolls, and Fashion Magic); Infant and Preschool (FISHER- PRICE, Disney Preschool and Plush, POWER WHEELS, SESAME STREET, SEE 'N SAY, MAGNA DOODLE, and VIEW-MASTER); Entertainment (Disney, Nickelodeon, games and puzzles); Wheels (HOT WHEELS, MATCHBOX, Tyco Electric Racing and Tyco Radio Control); and Large and Small Dolls (CABBAGE PATCH KIDS, POLLY POCKET and Tyco large dolls and plush). RESULTS OF OPERATIONS --------------------- The Company's business is seasonal, and, therefore, results of operations are comparable only with corresponding periods. Following is a percentage analysis of operating results: <TABLE> <CAPTION> For the For the Three Months Ended Six Months Ended ------------------------ ------------------------ June 30, June 30, June 30, June 30, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales 100% 100% 100% 100% =========== =========== =========== =========== Gross profit 47% 47% 47% 47% Advertising and promotion expenses 13 14 13 14 Other selling and administrative expenses 22 20 24 23 Integration and restructuring costs - - - 16 Other expense, net - - 1 1 ----------- ----------- ----------- ----------- Operating profit (loss) 12 13 9 (7) Interest expense 2 2 2 2 ----------- ----------- ----------- ----------- Income (loss) before income taxes 10% 11% 7% (9)% =========== =========== =========== =========== </TABLE> SECOND QUARTER - -------------- Net sales in the second quarter of 1998 decreased by 11%, including a net $14.6 million unfavorable effect from the generally stronger US dollar relative to last year. At comparable foreign currency exchange rates, sales decreased by 10%. Sales were negatively impacted in the quarter by a change in buying practices by Toys R Us, the Company's largest customer. Sales of the Company's Wheels category increased 11%, led by an increase in HOT WHEELS vehicles and playsets, partially offset by a decline in Tyco Radio Control. The Entertainment category increased 3%, primarily due to higher sales of Nickelodeon products. Sales of BARBIE and BARBIE-related products, including Fashion Magic products, decreased 17%. The Infant and Preschool category decreased 6%, mainly due to lower sales of FISHER-PRICE and SESAME STREET, partially offset by higher sales of WINNIE THE POOH. Sales to customers within the United States decreased 15%, mainly as a result of the change in buying practices by Toys R Us and high retail inventory levels of certain BARBIE dolls entering the year. Sales to customers outside the United States decreased 3% compared to 1997, including the unfavorable effect of generally stronger US dollar relative to the year-ago quarter. At comparable foreign currency exchange rates, sales internationally grew 2%. Gross margin, as a percentage of net sales, remained virtually constant. Advertising and promotion as a percentage of net sales decreased one percentage point to 13% as the Company continues to reduce non-media spending. As a percentage of net sales, other selling and administrative expenses increased two percentage points over the year-ago quarter; however, the expenses decreased by $2.0 million reflecting direct cost savings realized from the Tyco integration and Mattel restructuring. Other expense, net decreased by $4.0 million mainly due to a favorable impact from foreign exchange and higher interest income. Interest expense declined by $2.9 million primarily due to realization of savings from the refinancing of Tyco debt and the Company's favorable cash position. SIX MONTHS - ---------- Net sales in the first half of 1998 decreased $99.5 million or 6%, including a net $29.3 million unfavorable effect from the generally stronger US dollar relative to last year. Sales of the Company's Infant and Preschool brands increased 10%, led by strength in Disney's WINNIE THE POOH and growth in SESAME STREET, partially offset by a decline in FISHER-PRICE products. The Wheels category increased 10%, led by an increase in HOT WHEELS, partially offset by a decline in Tyco Radio Control. The Entertainment category increased 8%, primarily due to higher sales of Nickelodeon products. Sales of BARBIE and BARBIE-related products, including Fashion Magic products, decreased 17% primarily due to the change in buying practices by Toys R Us and high retail inventory levels of certain BARBIE dolls entering the year. Sales to customers within the United States decreased 7%. Sales to customers outside the United States decreased 3%, including the unfavorable effect from the generally stronger US dollar relative to the year-ago period. At comparable foreign currency exchange rates, sales internationally increased 3%. Gross profit, as a percentage of net sales, remained virtually constant. Advertising and promotion as a percentage of net sales decreased one percentage point to 13% primarily due to synergies realized from the merger with Tyco and reductions in non-media spending. Although other selling and administrative expenses increased one percentage point as a percentage of net sales, it decreased by $3.5 million reflecting direct cost savings realized from the Tyco integration and Mattel restructuring. Interest expense decreased $6.1 million or 16% primarily due to realization of savings from the refinancing of Tyco debt and the Company's favorable cash position. ACQUISITIONS AND NONRECURRING ITEM ---------------------------------- On July 9, 1998, the Company completed its previously announced acquisition of Pleasant, a Wisconsin-based direct marketer of books, dolls, clothing, accessories and activity products bearing the "American Girl" brand. The purchase price included net cash consideration of approximately $715 million, including costs directly related to the acquisition, subject to certain adjustments, and the assumption by the Company of certain indebtedness. The acquisition will be accounted for using the purchase method of accounting and, accordingly, the results of operations of Pleasant will be included in the Company's consolidated financial statements from the date of acquisition. On June 19, 1998, the Company acquired a controlling interest in Bluebird, a company organized in the United Kingdom, from which Mattel licenses the product designs for its POLLY POCKET and Disney Tiny Collections brands, as well as the POLLY POCKET trademarks. The aggregate purchase price, including investment advisor and other directly related expenses was approximately $80 million. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations of Bluebird have been included in the Company's consolidated financial statements since the date of acquisition. Intercompany accounts and transactions between Bluebird and the Company have been eliminated. The excess of cost over the estimated fair market value of tangible net assets acquired is being amortized on a straight-line basis over 30 years. On January 8, 1998, the Company acquired PrintPaks, a Portland, Oregon-based publisher of multimedia craft products. The purchase price included net cash consideration of $11.1 million. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of PrintPaks have been included in the Company's consolidated financial statements since the date of the acquisition. The agreement and plan of merger also provides for future contingent consideration in the event that net sales of PrintPaks product lines reach or exceed certain levels in each of calendar years 1998, 1999, and 2000. In connection with the Tyco merger, the Company commenced an integration and restructuring plan and recorded a $275 million pre-tax charge against operations in March 1997. After related tax effects, the net $210 million charge impacted year- to-date earnings by $0.72 per share. The plan consisted of consolidating certain manufacturing and distribution operations, eliminating duplicative marketing and administrative offices, terminating various distributor and licensing arrangements and abandoning certain product lines. Included in the charge was approximately $86 million for estimated severance costs related to the elimination of 2,700 positions principally associated with facilities to be closed. The remainder of the charge consisted of transaction costs related to the merger, asset write-downs and contract termination expenses. Of the total pre-tax charge, approximately $90 million represents non-cash asset write-downs. Through June 30, 1998, the total integration and restructuring expenditures and write-offs were approximately $208 million, $66 million of which related to severance payments. The plan is expected to be substantially completed in 1998. FINANCIAL CONDITION ------------------- The Company's financial position remained strong during the 1998 second quarter. The Company's cash position as of June 30, 1998 was $151.9 million compared to $59.0 million as of the second quarter 1997. Cash decreased by $543.0 million since December 31, 1997 primarily due to funding of operating activities. Inventory balances increased $198.7 million since year end and $75.1 million over the 1997 quarter end, primarily as a result of the Company's production in support of future sales volume. Prepaid expenses and other current assets increased $60.3 million over the 1997 quarter-end, mainly due to higher deferred income tax benefits related to the Tyco integration and Mattel restructuring charge. Intangibles increased $42.6 million since year-end, primarily due to the Company's acquisitions of PrintPaks and Bluebird during the first and second quarters of 1998, respectively, partially offset by amortization. Sundry assets decreased $36.8 million, as compared to the year-ago quarter, primarily due to lower deferred income taxes that were reclassified to prepaid expenses. Current portion of long-term liabilities decreased $219.4 million over the 1997 quarter-end, primarily due to the repayment of the $100.0 million 6-7/8% Senior Notes which matured on August 1 and the $126.5 million Tyco 10-1/8% Senior Notes which were redeemed on August 15. Accrued liabilities decreased $36.5 million compared to the year-ago quarter, mainly due to the completion of certain activities related to the Tyco integration and Mattel restructuring partially offset by the accrual for the purchase of Bluebird. Seasonal financing needs for the next twelve months are expected to be satisfied through internally generated cash, issuance of commercial paper, issuance of long-term debt, and use of the Company's various short-term bank lines of credit. Details of the Company's capitalization are as follows: <TABLE> <CAPTION> (In millions) June 30, 1998 June 30, 1997 Dec. 31, 1997 - ------------- ---------------------------------------------- <S> <C> <C> <C> Medium-Term Notes $ 520.5 20% $ 380.0 17% $ 520.5 20% 6-3/4% Senior Notes 100.0 4 100.0 4 100.0 4 Convertible Subordinated Notes - - 16.0 1 - - Other long-term debt obligations 43.3 2 53.6 2 55.0 2 ----------------------------------------------- Total long-term debt 663.8 26 549.6 24 675.5 26 Other long-term liabilities 134.5 5 117.7 5 132.8 5 Shareholders' equity 1,802.2 69 1,644.2 71 1,822.1 69 ---------------------------------------------- $2,600.5 100% $2,311.5 100% $2,630.4 100% ============================================== </TABLE> Total long-term debt increased as a percentage of total capitalization compared to the year-ago quarter, primarily due to the issuance of $140.5 million of Medium-Term Notes. Future long-term capital needs are expected to be satisfied through the retention of corporate earnings and the issuance of long-term debt instruments. Shareholders' equity increased $158.0 million since June 30, 1997, primarily due to the cumulative earnings and issuance of treasury stock for the exercises of employee stock options, partially offset by treasury stock repurchases, dividends declared to common and preferred shareholders, and unfavorable currency translation adjustments. During July 1998, the Company incurred short-term borrowings in connection with the acquisitions of Pleasant and Bluebird, $300.0 million of which will be repaid from the net proceeds received from the issuance of long-term debt securities under its current universal shelf registration statement. FOREIGN CURRENCY RISK --------------------- The Company enters into foreign currency forward exchange and option contracts primarily as hedges of inventory purchases, sales and other intercompany transactions denominated in foreign currencies, to limit the effect of exchange rate fluctuations on the results of operations and cash flows. Market risk exposures exist with respect to the settlement of foreign currency transactions during the year because currency fluctuations cannot be predicted with certainty. The Company's primary market risk exposures are in Europe and Asia. The Company seeks to mitigate its exposure to market risk by monitoring its currency exchange exposure for the year and partially or fully hedging such exposure. In addition, the Company manages its exposure through the selection of currencies used for international borrowings and intercompany invoicing. The Company does not trade in financial instruments for speculative purposes. CERTAIN CONSIDERATIONS ---------------------- The Company has reviewed its computer systems and developed a plan to achieve proper processing of transactions in the year 2000 and beyond. Management believes that all of Mattel's computer systems will be year 2000 compliant by the end of second quarter 1999. Costs incurred to date to implement the plan have not been material and are not expected to be material to operating results in the future. However, there can be no assurance that the systems of other companies on which Mattel's systems rely will also be timely converted or that any such failure to convert by another company would not have an adverse effect on Mattel's systems. Any significant disruption of the Company's ability to communicate electronically with its business partners could negatively impact the Company's business, financial condition and results of operations. The statement set forth herein is forward-looking, and actual results may differ materially (see the Cautionary Statement above).
PART II -- OTHER INFORMATION ---------------------------- ITEM 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- The Annual Meeting of Shareholders of Mattel, Inc. was held on May 6, 1998, for the purpose of electing directors, approving the 1997 Premium Price Stock Option and the Mattel Management Incentive Plans and an amendment to Article Fourth of Mattel's Restated Certificate of Incorporation, and approving the appointment of independent auditors. Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934 and there was no solicitation in opposition to that of management. All of management's nominees for directors as listed in the proxy statement were elected with the number of votes cast for each nominee as follows: Shares Voted Votes "FOR" Withheld ------------- ---------- Jill E. Barad 254,641,544 2,323,109 Harold Brown 256,711,964 2,323,109 Tully M. Friedman 256,859,412 2,323,109 Joseph C. Gandolfo 254,430,701 2,323,109 Ronald M. Loeb 252,965,531 2,323,109 Ned Mansour 254,568,637 2,323,109 William D. Rollnick 256,814,579 2,323,109 Christopher A. Sinclair 256,858,376 2,323,109 Bruce L. Stein 254,562,709 2,323,109 John L. Vogelstein 256,749,371 2,323,109 The Mattel, Inc. 1997 Premium Price Stock Option Plan was approved by the following vote: Shares Voted Shares Voted Shares Broker "FOR" "AGAINST" "ABSTAINING" "NON-VOTE" ------------ ------------ ------------ ---------- 132,108,956 86,390,970 1,381,596 37,960,489 The Mattel Management Incentive Plan was approved by the following vote: Shares Voted Shares Voted Shares Broker "FOR" "AGAINST" "ABSTAINING" "NON-VOTE" ------------ ------------ ------------ ---------- 249,676,453 6,803,656 1,361,902 0 The amendment to Article Fourth of the Company's restated Certificate of Incorporation was approved by the following vote: Shares Voted Shares Voted Shares Broker "FOR" "AGAINST" "ABSTAINING" "NON-VOTE" ------------ ------------ ------------ ---------- 241,138,084 15,013,571 1,690,356 0 The proposal to appoint Price Waterhouse LLP as independent accountants for the Company for the year ending December 31, 1998 was ratified by the following vote: Shares Voted Shares Voted Shares Broker "FOR" "AGAINST" "ABSTAINING" "NON-VOTE" ------------ ------------ ------------ ---------- 256,591,830 604,918 645,263 0 A stockholder proposal regarding executive compensation was included in the Proxy Statement dated March 30, 1998. A motion was not made at the meeting to vote on this proposal. Priort to the meeting, the following votes had been cast by proxy on this proposal: Shares Voted Shares Voted Shares Broker "FOR" "AGAINST" "ABSTAINING" "NON-VOTE" ------------ ------------ ------------ ---------- 11,158,925 200,817,743 7,900,958 37,960,430
ITEM 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits -------- 10.0 First Amendment to the Mattel, Inc. 1997 Premium Price Stock Option Plan 10.1 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997 Premium Price Stock Option Plan (25% Premium Grant), as amended 10.2 Form of Option and TLSAR Agreement under the Mattel, Inc. 1997 Premium Price Stock Option Plan (33-1/3% Premium Grant), as amended 11.0 Computation of Income (Loss) per Common and Common Equivalent Share 12.0 Computation of Ratio of Earnings (Loss) to Fixed Charges and Ratio of Earnings (Loss) to Combined Fixed Charges and Preferred Stock Dividends 27.0 Financial Data Schedule (EDGAR filing only) (b) Reports on Form 8-K ------------------- Mattel, Inc. filed the following Current Reports on Form 8-K during the quarterly period ended June 30, 1998: Financial Date of Report Items Reported Statements Filed -------------- -------------- ---------------- April 17, 1998 5, 7 None June 16, 1998 5, 7 None
SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTEL, INC. ------------ (Registrant) Date: As of July 20, 1998 By: /s/ Kevin M. Farr ------------------- ----------------------- Kevin M. Farr Senior Vice President and Controller