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MATTEL, INC. 1998 ANNUAL REPORT
Mattel, Inc. 1998 Annual Report

Table of contents

  • Page 1
    M AT T E L , I N C . 1 9 9 8 A N N UA L RE P O RT Mattel, Inc. 1998 Annual Report

  • Page 2

  • Page 3
    Financial Highlights Operating Results Net Sales (In millions) 1994 1995 For the Year 1996 1997 1998 $3,971 276 225 $4,370 347 338 $4,535 372 372 As of Year End $4,835 500 285 $4,782 364 332 Income (Before Restructuring, Extraordinary Item and Special Charges) Net Income F i n a n c i ...

  • Page 4
    ... retail sell-through of our products at our top U.S. accounts was up 12 percent, and retail inventories were down 30 percent in total, and down 50 percent at Toys "R" Us. As I said earlier, we knew that our world was changing, and we began taking strategic action as early as 1997 to position Mattel...

  • Page 5
    ... million Hot Wheels business in 1996 to a worldwide Wheels franchise totaling $700 million last year. The Tyco merger also gave us the opportunity to integrate the Infant and Preschool brands of Sesame Street, Magna Doodle and View-Master into the Fisher-Price brand, which along with Disney Infant...

  • Page 6
    ... in our fast-growing Wheels business, the much improved profitability at Fisher-Price and manufacturing efficiencies coming out of Asia. Though our margins held up well, our selling, general & administrative and advertising ratios were out of line, as we incurred costs in anticipation of reaching...

  • Page 7
    ... Lucille Ball, Elvis Presley and Audrey Hepburn. Our direct-to-consumer collector catalog has been a very successful tool for us and will be made even stronger when it is available online starting in the second half of this year. Our Barbie media business grew 39 percent to $80 million in 1998...

  • Page 8
    ...-growing new shopping sites on the worldwide web, thanks to "My Design," our design-your-own Barbie, which drew an average of 16.4 million daily hits in the month of December alone. American Girl, the second largest girls brand in the world, produced $300 million in full-year sales for 1998. We...

  • Page 9
    ... operation and our catalog products will be sold through our Web site as well. At $700 million in sales last year, Wheels is now our third largest category. Our combined Hot Wheels, Matchbox and Tyco Radio Control shipping increased by 21 percent in 1998, and our die-cast car unit sales increased to...

  • Page 10
    ...$20 million in sales and one Barbie title. Over the last two years, we have grown to a $100 million interactive franchise with the #1 top-selling children's title for three years in a row. This year, we will have 25 new Mattel Media titles, including CD-ROMs based on American Girl, Sesame Street and...

  • Page 11
    ... merger with The Learning Company in December. This merger will provide Mattel with tremendous opportunities for synergies, cross branding, age expansion, consumer relevancy and channel expansion. The Learning Company holds the #1 market share for both education software and productivity software...

  • Page 12
    ... 1996, our principal brands were Barbie, Fisher-Price, Disney, Hot Wheels, Nickelodeon and Cabbage Patch. Through our 1997 merger with Tyco, we added Matchbox, Tyco R/C, Sesame Street, View-Master and Magna Doodle. Last year, we added American Girl and the worldwide rights to Polly Pocket, which we...

  • Page 13
    ... to provide a gift of such lasting benefit to Mattel's hometown, while - through the hospital's renowned research and teaching activities - helping boys and girls in need all around the world. Mattel is a strong company and will be even stronger. We should generate $600 million in annual cash flow...

  • Page 14
    Mattel, Inc. 1998 Annual Report 12 To O u r S h a re h o l d e r s Fr ançais 13 Deutsch 15 Italiano 17 Español 19 Japanese 21 Chinese 22

  • Page 15
    ... nous avons annoncé l'acquisition de Pleasant Company et de sa marque phare "American Girl", qui nous a immédiatement permis d'augmenter nos ventes directes aux consommateurs de 300 millions $, et nous a dotés de l'infrastructure nécessaire pour vendre de nombreuses marques Mattel directement au...

  • Page 16
    Mattel, Inc. 1998 Annual Report 14 Et en 1998, Barbie est entrée avec succès sur Internet. D'après Media Metrix, Barbie.com a été un des nouveaux sites de ventes le plus en expansion sur le web mondial, grâce à "My Design Barbie", la nouvelle poupée Barbie que l'on peut créer sur mesure. ...

  • Page 17
    ... in diese Richtung wurde im März 1997 unternommen, als wir die Fusion mit Tyco, dem drittgrößten Spielwarenhersteller der USA, ankündigten. Im Juni letzen Jahres gaben wir dann die Übernahme der Pleasant Company und seiner erstklassigen Marke "American Girl" bekannt, welches uns sofort ein zus...

  • Page 18
    ... im weltweiten Web genannt, und dies dank "My Design", wo Mädchen eine Barbie Puppe nach ihren Wünschen herstellen können. American Girl, die zweitgrößte Mädchenmarke der Welt, produzierte für 1998 einen Umsatz von $ 300 Millionen. Und da das gesamte Geschäft der Pleasant Company bisher in...

  • Page 19
    ...più alto, grazie a , il nostro nuovo prodotto Disegna la tua Barbie. American Girl, la seconda linea di prodotti per bambine più nota al mondo, ha raggiunto i $300 milioni di vendite globali per il 1998. E dal momento che tutto il giro d'affari della Pleasant Company era limitato agli...

  • Page 20
    Mattel, Inc. 1998 Annual Report 18 Con vendite di $1.7 miliardi, il business delle nostre linee Infant e Preschool è ora equivalente al volume d'affari di Barbie. Inoltre, tutte le nostre linee e i personaggi Infant e Preschool verranno da ora in poi commercializzate sotto il marchio Fisher-Price...

  • Page 21
    ... se llevó a cabo en marzo de 1997, con el anuncio de nuestra fusión con Tyco, la tercera compañía juguetera de Estados Unidos. Posteriormente, en junio de 1998, hicimos pública la adquisición de Pleasant Company y su marca estrella "American Girl", que supone un negocio de venta directa...

  • Page 22
    Mattel, Inc. 1998 Annual Report 20 Barbie también se abrió camino con éxito en Internet durante el año 1998. La página web Barbie.com fue considerada por Media Metrix una de las páginas web de compra directa con mayor crecimiento de la red mundial, gracias a la sección "My Design", donde ...

  • Page 23
    Mattel, Inc. 1998 Annual Report 21 Japanese 1998 17 Toys "R" Us 3 5 3 12 1 1 $1.2 1998 50% 1997 30% $1.2 1% 14 12% Toys "R" Us 30% 2 1998 7 6 3 12 2 2 10 1 2 1998 1998 1998 4 14% 3 5 10 30% 1998 1997 49.4 49.6 20 17 1998 1998 Barbie.com 8 39 2 1998 3 2000

  • Page 24
    .... 1998 Annual Report 22 Chinese Barbie Fisher-Price Toys "R" Us Barbie 49.4% Barbie (American Girl) Mattel Barbie Barbie Barbie Barbie.com "My Design," Media Metrix Barbie Toys "R" Us American Girl Pleasant Mattel 'American Girl' Mattel Barbie Tyco FisherPrice Pleasant ("American Girl...

  • Page 25
    Mattel, Inc. 1998 Annual Report 23 Barbie The Learning Company Microsoft The Learning Company Mattel

  • Page 26
    Mattel, Inc. 1998 Annual Report 24 Financial Information Five-Year Summar y 25 Management's Discussion and Analysis of Financial Condition And Results of Oper ations 26 Consolidated Financial Statements 33 Notes to Consolidated Financial Statements 37 Management Repor t on Responsibility ...

  • Page 27
    ... 1998, operating profit was reduced by a nonrecurring charge of $38.0 million related to a voluntary recall of certain Power Wheels®‚ ride-on vehicles and a one-time charge of $6.0 million in connection with the proposed Toys R Us-related antitrust litigation settlement. In 1997, operating profit...

  • Page 28
    ...: Girls - including Barbie® fashion dolls and accessories, collector dolls, software, Fashion Magic®, American Girl®, Cabbage Patch Kids®, and Polly Pocket® Infant and Preschool - including Fisher-Price®, Disney preschool and plush, Power Wheels®, Sesame Street®, See 'N Say®, Magna...

  • Page 29
    ... Company acquisition in July 1998, the American Girl® brand contributed $213.2 million in gross sales, which helped to partially offset the decline in Barbie®. Sales in the Infant and Preschool category decreased 3%, largely attributable to declines in Sesame Street® and Fisher-Price® products...

  • Page 30
    ... credit lines with a number of banks available in 1999, which will be used as needed to finance seasonal working capital requirements of certain foreign affiliates. Pending Business Combination In December 1998, Mattel and The Learning Company entered into a merger agreement. The stock-for-stock...

  • Page 31
    ...aggregate. In July 1998, the Company completed its acquisition of Pleasant Company, a Wisconsin-based direct marketer of books, dolls, clothing, accessories, and activity products included under the American Girl® brand name. The Company paid approximately $715 million, including investment advisor...

  • Page 32
    ...California, County of Los Angeles. Ms. Greenwald is a former employee whom the Company terminated in July 1995. Her complaint sought $50 million in general and special damages, plus punitive damages, for breach of oral, written and implied contract, wrongful termination in violation of public policy...

  • Page 33
    Mattel, Inc. and Subsidiaries 31 For the purchase of foreign currencies, fair value reflects the amount, based on dealer quotes, that the Company would pay at maturity for contracts involving the same currencies and maturity dates, if they had been entered into as of year-end 1998 and 1997. For ...

  • Page 34
    ... on the Company's consolidated financial position or results of operation. All costs of addressing the year 2000 issue will be funded from internally generated cash. The Company sells software products as part of its core businesses. All software products currently available for sale to consumers...

  • Page 35
    ... issued and outstanding in 1998 and 1997, respectively 772 Common stock $1.00 par value, 1.0 billion shares authorized; 300.4 million shares issued in 1998 and 1997, respectively 300,381 Additional paid-in capital 482,662 Treasury stock at cost; 14.3 million and 8.8 million shares in 1998 and 1997...

  • Page 36
    Mattel, Inc. and Subsidiaries 34 Consolidated Statements of Operations For the Year (In thousands, except per share amounts) 1998 1997 1996 Net Sales Cost of sales Gross Profit Advertising and promotion expenses Other selling and administrative expenses Amortization of intangibles Special charges...

  • Page 37
    ... Investing Activities: Purchases of tools, dies and molds Purchases of other property, plant and equipment Payment for acquisitions, net of cash acquired Investment in other long-term assets Proceeds from sale of business and other property, plant and equipment Net proceeds from sales of marketable...

  • Page 38
    ... adjustments Comprehensive income Purchase of treasury stock Issuance of treasury stock Exercise of stock options Dividends declared on common stock Dividends declared on preferred stock Balance, December 31, 1998 The accompanying notes are an integral part of these statements. $ 52 $296,080...

  • Page 39
    ... is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of catalogue production and mailing costs that are generally amortized within three months from the date catalogues are mailed. Advertising costs associated with customer benefit...

  • Page 40
    ... in 1998 because they were anti-dilutive in each quarter and for the full year. Preferred stock was excluded from the calculation of diluted earnings per share in 1997 because it was anti-dilutive. A warrant issued in 1996 to purchase 3.0 million shares of the Company's common stock was excluded...

  • Page 41
    ... and $16.2 million in 1998, 1997 and 1996, respectively. Pension Plans The Company provides defined benefit pension plans, which satisfy the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). With the exception of the Fisher-Price Pension Plan, activity related to the...

  • Page 42
    ... Benefits Fisher-Price has an unfunded postretirement health insurance plan covering certain eligible domestic employees hired prior to January 1, 1993. Details of the expense for the Fisher-Price plan recognized in the consolidated financial statements for the years ended December 31, 1998, 1997...

  • Page 43
    ... financial performance of the Company over a three-year period. Amounts charged to operating expense in 1998, 1997 and 1996 under the current plan were $10.8 million, $13.8 million and $3.9 million, respectively. The Company also has annual incentive compensation plans for officers and key employees...

  • Page 44
    ... In 1990, the Company borrowed $45.0 million under a mortgage agreement secured by its headquarters office facility in El Segundo, California. Interest accrues at 10.15% and monthly principal and interest payments are due through December 2005. The fair value of the original mortgage note, estimated...

  • Page 45
    ... in any single calendar year. On February 4, 1999, the Company's board of directors approved an amendment to the 1996 Stock Option Plan authorizing an additional 6.0 million shares for grant in connection with new employees of businesses acquired by the Company. The aggregate number of shares of...

  • Page 46
    ... a change of control as defined in the plan. On February 4, 1999, the Company's board of directors approved an amendment to the 1997 Premium Price Stock Option Plan authorizing an additional 3.0 million shares for grant in connection with new employees of businesses acquired by the Company, bringing...

  • Page 47
    ... licensing agreement, which contains annual minimum royalty guarantees, permits the Company to use the Disney name and certain characters on preschool and infant products through September 2002. In related agreements, the Company participates in attractions and toy stores at three Disney theme parks...

  • Page 48
    ... the water supply and self-reported the sample results to the Oregon Department of Environmental Quality ("DEQ") and Oregon Health Division. The Company also implemented an employee communication and medical screening program. In November 1998, the Company and another potentially responsible party...

  • Page 49
    ...13, 1995, Michelle Greenwald filed a complaint against the Company in Superior Court of the State of California, County of Los Angeles. Ms. Greenwald is a former employee of Mattel who was terminated in July 1995. Her complaint sought $50 million in general and special damages, plus punitive damages...

  • Page 50
    ... financial statements from their respective dates of acquisition. In July 1998, the Company completed its acquisition of Pleasant Company, a Wisconsin-based direct marketer of books, dolls, clothing, accessories, and activity products included under the American Girl® brand name. The purchase price...

  • Page 51
    ... follows: Girls - including Barbie® fashion dolls and accessories, collector dolls, software, Fashion Magic®, American Girl®, Cabbage Patch Kids®, and Polly Pocket® Infant and Preschool - including Fisher-Price®, Disney preschool and plush, Power Wheels®, Sesame Street®, See 'N Say®, Magna...

  • Page 52
    Mattel, Inc. and Subsidiaries 50 Note 9 - Quarterly Financial Information (Unaudited) (In thousands, except per share amounts) Year Ended December 31, 1998 Net sales Gross profit Advertising and promotion expenses Other selling and administrative expenses Amortization of intangibles Special ...

  • Page 53
    ... 1997 $ 48,620 380,224 $428,844 Report of Independent Accountants Note 11 - New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement...

  • Page 54
    ... To the Board of Directors and Stockholders of Mattel, Inc. Management is responsible for the preparation of the Company's consolidated financial statements and the related financial and non-financial information appearing in this annual report. The financial statements have been prepared in...

  • Page 55
    ... Chief Financial Officer President, Corporate Operations and General Counsel, Mattel, Inc. Andrea L. Rich (3) (6) President and Chief Executive Officer, Los Angeles County Museum of Art Glenn Bozarth Senior Vice President, Corporate Communications William D. Rollnick (1) (2) (3) Retired Chairman...

  • Page 56
    ... to the Secretary of the Company, 333 Continental Boulevard, El Segundo, California 90245-5012. Trademark Legends Barbie, Fisher-Price, Hot Wheels, Matchbox,Tyco, American Girl, Mattel Media,View-Master, Generation Girl, My Design, Polly Pocket, Power Wheels, See 'N Say, X3 Microscope and Me2Cam are...

  • Page 57
    ©1999 Mattel, Inc. All Rights Reserved Printed in U.S.A. Printed on recycled paper.

  • Page 58
    Mattel, Inc. 333 Continental Boulevard El Segundo, California 90245