Mattel 1998 Annual Report Download - page 31

Mattel, Inc. and Subsidiaries 29
Acquisitions
During 1998, the Company acquired Pleasant Company and Bluebird.
These acquisitions were accounted for using the purchase method
of accounting, which means that the results of operations of the
acquired companies have been included in Mattel’s consolidated
financial statements from their respective dates of acquisition.
Proforma financial information for these acquisitions has not been
presented since they did not meet the test of significance individually
or in the 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 and other costs directly related to the acquisition.
The excess of cost over the estimated fair market value of tangible net
assets acquired was approximately $690 million. Total excess has been
allocated to customer lists, a covenant not-to-compete, and magazine
subscription lists that are being amortized on a straight-line basis over
a 3 to 15 year period, with the remaining excess being amortized on a
straight-line basis over 40 years.
In June 1998, the Company acquired Bluebird, a company
organized in the United Kingdom, from which Mattel previously
licensed the product designs for the Polly Pocket®and Disney Tiny
Collections brands, as well as the Polly Pocket®trademarks. The
Company paid approximately $80 million, which included investment
advisor and other directly related expenses. Intercompany accounts
and transactions between Mattel and Bluebird have been eliminated
from the consolidated financial statements. The excess of cost over
the estimated fair market value of tangible net assets acquired was
approximately $60 million, which is being amortized on a straight-
line basis over 40 years.
Business Combination and Related Integration and
Restructuring Charge
In March 1997, the Company completed its merger with Tyco.
The merger was accounted for as a pooling of interests, which
means that for accounting and financial reporting purposes, Mattel’s
consolidated financial statements have been restated to present the
combined companies’ financial position and results of operations for
1996 through 1997. Under the merger agreement, each Tyco common
stockholder received 0.48876 shares of Mattel common stock for
each share of Tyco common stock outstanding, which resulted in the
issuance of approximately 17 million Mattel common shares. Each
share of Tyco Series B and Series C preferred stock was converted
into like Mattel preferred stock.
In connection with this merger, the Company commenced
an integration and restructuring plan and recorded a $275.0 million
pre-tax charge against operations in March 1997. After related tax
effects, the Company’s 1997 earnings were impacted by $0.71 per
diluted share as a result of the net $209.7 million charge. The
integration and restructuring activity was substantially complete as
of December 31, 1998. The Company realized annualized cost
savings of approximately $160 million, mainly in the areas of cost
of production, advertising, selling and administrative expenses, and
financing costs.
Special Charges
In the 1998 third quarter, the Company voluntarily recalled certain
Power Wheels® ride-on vehicles and recognized a $38.0 million
pre-tax charge in its results of operations. After related tax effects,
the net $27.2 million charge impacted the 1998 earnings by $0.09
per diluted share. 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 Company believes the amount reserved will be
sufficient to cover all costs associated with the recall.
In the 1998 fourth quarter, the Company recognized a $6.0
million pre-tax charge related to the proposed settlement of the
Toys R Us-related antitrust litigation. After related tax effects, the net
$4.3 million charge impacted the 1998 earnings by $0.01 per diluted
share. The Company is required to make cash and toy contributions
prior to November 1999 according to the terms of the proposed
settlement agreement.
Litigation
Beaverton, Oregon
The Company operates a manufacturing facility on a leased property
in Beaverton, Oregon that was acquired as part of its merger with
Tyco. In March 1998, samples of groundwater used by the facility
for process water and drinking water disclosed elevated levels of
certain chemicals, including trichloroethylene (“TCE”). The Company
immediately closed the water supply and self-reported the sample
results to the Oregon Department of Environmental Quality (“DEQ”)
and the Oregon Health Division. The Company also implemented
an employee communication and medical screening program.
In November 1998, the Company and another potentially
responsible party entered into a consent order with the DEQ to
conduct a remedial investigation/feasibility study at the site, to
propose an interim remedial action measure and to continue the
community outreach program to employees, former employees and
surrounding landowners. It is not presently possible to estimate the
cost to the Company related to the DEQ’s investigation and any
subsequent orders for future work.
Toys R Us
On September 25, 1997, an administrative law judge of the Federal
Trade Commission issued his initial decision in the matter In re Toys
R Us, Inc. The administrative law judge made findings of fact and
conclusions of law that the toy retailer Toys R Us, Inc. had violated
federal antitrust laws and entered into vertical and horizontal
arrangements with various toy manufacturers, including Mattel,
whereby the manufacturers would refuse to do business with ware-
house clubs, or would do business with warehouse clubs only on
terms acceptable to Toys R Us. On October 13, 1998, the Federal
Trade Commission issued an opinion and a final order affirming the
findings and conclusions of the administrative law judge. Toys R Us
has now filed a notice of appeal in the United States Court of
Appeals for the Seventh Circuit.
Following the announcement of the administrative law judge’s
decision, the Company was named as a defendant, along with certain
other toy manufacturers, in a number of antitrust actions in various