Mattel 1998 Annual Report Download - page 34

Mattel, Inc. and Subsidiaries 32
ended December 31, 1998. The US Consumer Price Index increased
1.6% in 1998, 1.7% in 1997 and 3.3% in 1996. The Company 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
Many currently installed computer systems and software products,
including several used by the Company, are coded to accept only
two-digit (rather than four-digit) entries in the date code field used to
define the applicable year. In such instances, the first two characters
are assumed to be “19”. Beginning in the year 2000 or perhaps earlier
if referencing a date in the year 2000, such computer systems and
software products may recognize a date using “00” as the year 1900,
rather than the year 2000, which could result in miscalculations or
system failures. To address the year 2000 issue, in early 1998 the
Company established a project team and initiated a comprehensive
plan that is designed to assess, remediate and test Mattel’s internal sys-
tems, hardware and processes, including key operational, manufacturing
and financial systems. The progress of this plan is continually monitored
and regularly reported to management. In addition, the Company’s
board of directors is regularly informed about the year 2000 issue
both generally and as it may affect the Company’s business.
The Company’s internal year 2000 project team oversees all
aspects of implementing the plan. The team is comprised of staff
members from the information systems department having the
requisite knowledge of the Company’s computer systems, including
all the technical aspects of the systems. Key user group designees
from business areas are included on each system team, which is
guided by a central project team. The Company does not plan on
engaging outside consultants, technicians or other external resources
to assist in formulating and implementing the program.
The Company’s plan adheres to a multi-step process that
includes five distinct phases of activity: (1) awareness; (2) inventory
and risk assessment; (3) code and system modification; (4) testing;
and (5) contingency planning.
Under the first two phases of the plan, all operational, manufac-
turing and financial systems were inventoried and evaluated. This inven-
tory included all software systems, computer hardware, facilities, and
production equipment containing or depending upon a computer chip.
As a result of such evaluation, the Company established detailed plans
and action steps required to address all aspects of the year 2000 issue,
including all code and system modifications (phase 3). The Company
has completed the awareness, inventory and code change phases of
the plan as scheduled prior to December 1998. Critical system verifi-
cation and testing (phase 4) is expected to be complete by July 1999.
The Company initiated formal communications with each of
its significant suppliers and customers to determine the extent to
which they are addressing the year 2000 issue and the effect on its
business should those parties fail to adequately address the issue.
To date, the Company has received responses from the majority of
the initial contacts. These responses have been positive and support
the overall initiatives toward achieving year 2000 compliance. The
Company is actively following-up with those customers and suppliers
failing to reply to the initial inquiry.
Due to the general uncertainty inherent in the year 2000
issue, largely resulting from uncertainty of the readiness of third-
party suppliers and customers, the Company is currently unable to
assess the overall impact on its business. The risk of third-party
suppliers and customers not correcting a material year 2000 problem
could result in an interruption in, or a failure of, certain normal busi-
ness activities or operations of such suppliers, customers, and/or the
Company. Such failures could materially and adversely affect the
Company’s results of operations, liquidity and financial position. As a
result, during the first half of 1999 the Company is developing
contingency plans (phase 5), which it expects to be complete by July
1999. Contingency planning is being done on a worldwide basis by
all the business units. Each unit will concentrate on factors external
to the Company which may adversely impact their ability to conduct
operations. Specifically, for those locations where a high likelihood of
a material failure exists, the Company will establish revised procedures
for managing operations, including identification of alternate suppliers
and vendors whose systems are year 2000 compliant.
While there is no guarantee, management believes that the
Company’s year 2000 plan should greatly reduce its level of uncertainty
about the issue and mitigate the possibility of significant interruptions
of ongoing operations. Additionally, its global presence and broad-based
manufacturing capability should provide the Company with numerous
options to further mitigate the risk of year 2000 non-compliance.
As of December 31, 1998, the Company has spent approxi-
mately $6 million and expects to incur a total of approximately $10
million in connection with addressing the year 2000 issue. These costs
are largely due to the use of internal resources dedicated to achieving
year 2000 compliance. Costs are charged to expense as they are
incurred. Work on the year 2000 issue has not delayed any internal
projects that would have a material effect on the Company’s consoli-
dated 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 and those products previously purchased by consumers
are year 2000 compliant. Software products manufactured for the
Company by third-parties under licensing agreements have been
certified as year 2000 compliant by such manufacturers. The
Company will continue to ensure that all its software products in
development are year 2000 compliant.
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 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. The Company is required to adopt this
statement for its fiscal year beginning January 1, 2000. Management
believes the adoption of this statement will not have a material
impact on the Company’s consolidated financial position or results
of operations.