Mattel 1998 Annual Report Download - page 30

Mattel, Inc. and Subsidiaries 28
retailers in fourth quarter 1998. Inventories increased $155.5 million
to $584.4 million, reflecting the sales shortfall in the 1998 fourth
quarter and the addition of Pleasant Company inventory. Property,
plant and equipment, net grew $134.9 million to $736.5 million due
to assets acquired as part of the acquisition of Pleasant Company
and investments in the expansion of the Company’s manufacturing
facilities located in Mexico and Asia. Intangibles increased $719.4
million to nearly $1.25 billion due to goodwill generated from the
Pleasant Company and Bluebird acquisitions.
Short-term borrowings increased $116.5 million compared
to 1997 from financing the acquisitions of Pleasant Company and
Bluebird. Current portion of long-term liabilities increased $19.9
million primarily due to the reclassification of $30.0 million in medium-
term notes payable in 1999 from long-term debt.
A summary of the Company’s capitalization is as follows:
As o fY ear End
(In millions) 1998 1997
Medium-term notes $ 540.5 18% $ 520.5 20%
Senior notes 400.0 14 100.0 4
Other long-term debt obligations 43.0 1 55.0 2
Total long-term debt 983.5 33 675.5 26
Other long-term liabilities 141.3 5 132.8 5
Stockholders’ equity 1,820.2 62 1,822.1 69
$2,945.0 100% $2,630.4 100%
Total long-term debt increased $308.0 million mainly due
to the issuance of $300.0 million of senior notes to finance the
acquisitions of Pleasant Company and Bluebird. Medium-term notes
increased by $20.0 million due to the issuance of $50.0 million in
notes, partially offset by the reclassification of $30.0 million payable
in 1999 to current portion of long-term debt. The Company
expects to satisfy its future long-term capital needs through the
retention of corporate earnings and the issuance of long-term debt
instruments. In November 1998, the Company filed its current
universal shelf registration statement allowing it to issue up to $400.0
million of debt and equity securities, all of which was available to be
issued as of December 31, 1998. Stockholders’ equity of $1.8 billion
remained consistent with 1997 as a result of treasury stock purchases
and dividend declarations on common and preferred stock, which
were largely offset by profitable operating results and reissuance of
treasury stock for the exercise of nonqualified stock options by the
Company’s employees.
Liquidity
The Company’s primary sources of liquidity over the last three
years have been cash on hand at the beginning of the year, cash
flows generated from operations, long-term debt issuances and
short-term seasonal borrowings. Profitable operating activities
generated cash flows of $547.5 million during 1998, compared to
$481.9 million in 1997 and $524.8 million in 1996.
The Company invested its cash flows during the last three
years in the acquisitions of Pleasant Company and Bluebird, additions
to tooling in support of new products, and construction of new
manufacturing facilities.
The Company received cash flows from the issuance of senior
notes in 1998 and medium-term notes in 1998 and 1997. Cash
received from these debt issuances was used to fund the acquisitions
of Pleasant Company and Bluebird, to retire higher-cost debt and to
support operating activities. In 1998, the Company repaid the long-
term debt and mortgage note assumed as part of the Pleasant
Company acquisition. In 1997, the Company redeemed the 10-1/8%
notes assumed as part of the acquisition of Tyco and repaid its 6-7/8%
senior notes upon maturity. Cash was also spent during the last
three years to purchase treasury stock to provide shares for issuance
under the Company’s employee stock option plans and the exercise
of outstanding warrants. In addition, over the last three years, the
Company has consistently increased its cash payments for common
dividends.
Seasonal Financing
The Company expects to finance its seasonal working capital
requirements for the coming year by using existing and internally
generated cash, issuing commercial paper, selling certain trade
receivables and using various short-term bank lines of credit. The
Company’s domestic committed unsecured credit facility provides
$1.0 billion in short-term borrowings from a commercial bank
group. This facility provides for up to $700.0 million in advances
and backup for commercial paper issuances, and up to an additional
$300.0 million for nonrecourse purchases of certain trade accounts
receivable by the bank group over the next four years. Under its
domestic credit facility, the Company is required to meet financial
covenants for consolidated debt-to-capital and interest coverage.
Currently the Company is in compliance with such covenants.
The Company also expects to have approximately $370 million
of individual short-term foreign 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 transaction is subject to
approval by the stockholders of both Mattel and The Learning
Company and by certain regulatory agencies. The merger will be
accounted for as a pooling of interests, which means that for accounting
and financial reporting purposes, Mattel and The Learning Company
will treat their companies as if they had always been combined. The
combined company will likely incur transaction costs of approximately
$75 million to $85 million, including investment banking, legal and
accounting fees, and contractual incentive benefits. Management
believes the merger will be completed in the second quarter of
1999. The number of shares of Mattel common stock to be issued
to The Learning Company’s common and preferred stockholders,
together with the Mattel common stock to be issued upon the
exchange of the exchangeable shares of The Learning Company’s
Canadian subsidiary, is expected to represent between approximately
27% and 30% of Mattel’s outstanding voting power after the merger,
depending on the actual exchange ratio at the time of the merger.