Mattel 1999 Annual Report Download - page 18

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Mattel, Inc. and Subsidiaries
In the fourth quarter of 1 99 9, Mattel adjusted its restructuring and integra-
tion plan and other nonrecurring charges, resulting in a net reduction of approximately
$3 million. The credits to the restructuring plan of approximately $2 6 million were
mainly due to Mattel’s recent decision not to close certain of its marketing offices and
one of its manufacturing facilities. The remaining credits include other changes in
estimates and lower than anticipated costs compared to the previous estimates for
completed components of the plan. Approximately 90 0 employees will not be termi-
nated as a result of these changes.
The fourth quarter restructuring charge of approximately $1 8 million relates to
the termination of an additional 15 0 Learning Company employees at its domestic offices.
This action was taken to further consolidate the operations of Learning Company’s
domestic offices. The fourth quarter other nonrecurring charge relates to a $ 4.0 mil-
lion increase to the reserve for the October 1 99 8 recall of Mattel’s Power Wheels®
vehicles and a $ 1.1 million additional charge related to the Toys R Us-related antitrust
litigation settlement.
A description of the components of the restructuring and other nonrecurring
charges is as follows:
Severance and other compensation costs relate to the termination of
approximately 3,3 00 employees around the world. Approximately 2,30 0 of these
employees are hourly workers located in certain of Mattel’s manufacturing facilities,
of which approximately 2,2 00 were employed in the manufacturing facility in Kuala
Lumpur, which ceased operations in September 1999. The remainder of the w ork
force reductions consist of downsizing sales and marketing groups in the US, Europe
and Asia-Pacific regions as well as the elimination of duplicate administrative person-
nel following the consolidation of back-office functions, the majority of which are in
Europe. As of December 31 , 199 9, approximately $3 0 million had been paid to
nearly 2,7 00 terminated employees. Cash severance payments will extend beyond
the completion of the workforce reductions due to the severance payment options avail-
able 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 recog-
nized a $ 17 .5 million charge, mainly related to settlements for termination of cer-
tain 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 w ill 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 w ritedowns is concentrated in the Operations and Learning Company segments.
In addition, other asset writeoffs include approximately $1 0 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 connec-
tion with the merger. Also included in this amount are the contractual change of con-
trol payments arising from the merger. The majority of all merger-related transaction
costs were paid during the second quarter of 1 99 9.
Other nonrecurring charges principally include an additional $2 0.0 million related
to the October 1 99 8 recall of Mattel’s Power Wheels®vehicles and $ 14 .0 million for envi-
ronmental 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.
Mattel is currently undertaking a comprehensive review of its entire interactive
business to identify additional opportunities to improve operating productivity and realize
costs savings. Following this review, Mattel expects to incur pre-tax reorganizational
charges totaling approximately $7 5 million to $1 00 million in the first quarter of 2 00 0.
These charges are designed to streamline the infrastructure, product development cycle
and operations of Mattel Interactive. Additionally, compensation expense of approximately
$5 0 million, including forgiveness of certain executive loans, will be incurred in the first
quarter of 20 00 related to the recent departure of certain senior executives.
Litigation
Power Wheels®Recall and Related Matters
On October 2 2, 1 998, Mattel announced that Fisher-Price, in cooperation with the
Consumer Product Safety Commission, would conduct a voluntary recall involving up to
10 million battery-powered Power Wheels®ride-on vehicles. The recall did not result
from any serious injury, and involves the replacement of electronic components that
may overheat, particularly when consumers make alterations to the product. The
recall involves vehicles sold nationwide since 1 98 4 under nearly 10 0 model names.
Additionally, Fisher-Price has been notified by the Consumer Product Safety Commission
that the Commission is considering whether Fisher-Price may be subject to a fine for
delayed reporting of the facts underlying the recall.
In the third quarter of 1 99 8, Mattel recognized a $3 8.0 million pre-tax
charge related to the recall. During the second and fourth quarters of 19 99 , Mattel
recognized additional pre-tax charges totaling $2 0.0 million related to the recall.
Greenwald Litigation and Related Matters
On October 1 3, 1 995, Michelle Greenwald filed a complaint ( Case No. YC 02 5 00 8)
against Mattel in Superior Court of the State of California, County of Los Angeles.
Ms. Greenwald is a former employee whom Mattel terminated in July 1 99 5. Her
complaint sought $5 0 million in general and special damages, plus punitive damages,
for breach of oral, written and implied contract, wrongful termination in violation of
public policy and violation of California Labor Code Section 9 70 . Ms. Greenwald
claimed that her termination resulted from complaints she made to management con-
cerning general allegations that Mattel did not account properly for sales and certain
costs associated with sales and more specific allegations that Mattel failed to account
properly for certain royalty obligations to The Walt Disney Company. On December 5,
19 96 , Mattel’s motion for summary adjudication of Ms. Greenwald’s public policy claim
was granted. On March 7, 19 97 , Mattel filed a motion for summary judgment on the
remaining causes of action. On December 9 , 19 97 , Mattel’s motion for summary
judgment of Ms. Greenw ald’s remaining claims was granted. On February 4, 19 98 ,
Ms. Greenwald appealed from the dismissal of her suit. The appeal has been fully
briefed, and a hearing took place on March 3, 20 00 . Mattel intends to continue to
defend the action vigorously, including the appeal.