Mattel 1999 Annual Report Download - page 21

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Mattel, Inc. and Subsidiaries
Manufacturing Risk
Mattel owns and operates manufacturing facilities and utilizes third-party manufacturers
throughout Asia, primarily in China, Indonesia, Malaysia and Thailand. A risk of political
instability and civil unrest exists in these countries, which could temporarily or per-
manently damage Mattel’s manufacturing operations located there. Mattel’s business,
financial position and results of operations would be negatively impacted by a significant
disruption to its manufacturing operations or suppliers.
Effects of Inflation
Inflation rates in the US and in major foreign countries w here Mattel does business
have not had a significant impact on its results of operations or financial position
during the three years ended December 31 , 1 99 9. The US Consumer Price Index
increased 2 .7% in 1 99 9, 1.6 % in 1998 and 1.7% in 1 99 7. Mattel receives some
protection from the impact of inflation from high turnover of inventories and its ability
to pass on higher prices to consumers.
Year 2000 Update
To address the year 2 00 0 issue, in early 1 99 8 Mattel established an in-house 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. The plan also included steps to verify that all key third-party suppliers and
customers were taking measures to ensure their own readiness and timely implementation.
All phases of the year 2 00 0 readiness plan were completed as scheduled. To date,
Mattel has not experienced any year 2 00 0 issues with its internal operating systems or
with its third-party customers and suppliers. In addition, Mattel did not experience any
loss in revenues due to the year 20 00 issue.
All software products currently available for sale to consumers and under
development are year 20 00 compliant. However, several discontinued products sold in
the past may not operate as intended on certain computers due to the year 20 00 issue.
As of December 31, 1 99 9, Mattel spent a total of approximately $1 3 million
in connection with addressing the year 20 00 issue. Any additional charges are expected
to be minimal. These costs were largely due to the use of internal resources dedicated
to achieving year 20 00 compliance, and were charged to expense as incurred. All
costs of addressing the year 20 00 issue were funded from internally generated cash.
Although unlikely given that Mattel has not experienced any year 2 00 0 issues
to date, there can be no assurance that any future unforeseen year 20 00 issues or year
20 00 issues relating to possibly non-compliant softw are products will not materially
adversely affect Mattel’s results of operations, liquidity and financial position or adverse-
ly affect Mattel’s relationships with customers, vendors or others.
Euro Conversion
On January 1 , 19 99 , a single currency called the euro was introduced in Europe. Eleven
of the fifteen member countries of the European Union adopted the euro as their common
legal currency on that date. Fixed conversion rates between these countries’ existing
currencies, ‘ ’ legacy currencies’’, and the euro were established on that date. The legacy
currencies are scheduled to remain legal tender in these participating countries through
July 1, 20 02 . During the transition period, parties may settle transactions using the euro
or a participating country’s legacy currency.
Certain of Mattel’s European facilities adopted the euro as their functional
currency in 1 99 9. The cost of system modifications to accommodate the euro was not
material to Mattel’s results of operations. Based on currently available information,
the euro conversion has not had a material adverse impact on Mattel’s business or
financial condition.
New Accounting Pronouncement
In June 1 99 8, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 1 33 , Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. It also requires that
gains or losses resulting from changes in the values of those derivatives be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. Mattel is required to adopt this statement for its fiscal year beginning
January 1 , 20 01 . Management believes the adoption of this statement will not have
a material impact on Mattel’s consolidated financial position or results of operations.