Mattel 1999 Annual Report Download - page 37

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Mattel, Inc. and Subsidiaries
Warner Bros. Consumer Products a stock warrant to purchase 3.0 millions shares
of Mattel’s common stock. This w arrant became fully vested and exercisable upon
signing of the licensing agreement.
Licensing and related agreements provide for terms extending from 20 00
through 20 07 and contain provisions for future minimum payments as shown in the
following table ( in thousands):
Minimum Payments
2000 $134,000
2001 104,000
2002 69,000
2003 15,000
2004 18,000
Thereafter 6,0 0 0
$346,000
Royalty expense for the years ended December 31 , 1999, 1 99 8 and 1997
was $3 08 .6 million, $234.2 million and $2 25 .8 million, respectively.
As of December 31, 1 99 9, Mattel had outstanding commitments for 20 00
purchases of inventory of approximately $9 2 million.
Foreign Currency Contracts
To limit the exposure associated with exchange rate movements, Mattel enters into foreign
currency forw ard exchange and option contracts primarily as hedges of inventory purchases,
sales and other intercompany transactions denominated in foreign currencies. These contracts
generally have maturity dates of up to 18 months. Gains or losses related to firm commit-
ments, which qualify for hedge accounting, are deferred and are recognized in the results
of operations as part of the underlying transaction. Contracts that do not qualify for hedge
accounting are marked to market with gains and losses recognized in the results of opera-
tions. Had Mattel not entered into hedges to limit the effect of exchange rate fluctuations
on results of operations and cash flows, 1999 pre-tax income would have been reduced by
approximately $1 6 million.
As of December 31, 1 99 9 and 1 99 8, Mattel held the following contracts to
sell foreign currencies ( in thousands):
19 9 9 1 9 9 8
Amount Fair Value Amount Fair Value
Forwards $3 4 2 ,3 7 0 $334,6 8 8 $ 3 9 2,97 2 $ 3 9 4 ,340
Fair value for forwards reflects the amount, based on dealer quotes, Mattel
would receive at maturity for contracts involving the same currencies and maturity
dates, if they had been entered into as of year-end 1 99 9 and 1 99 8, respectively.
As of December 31, 1 99 9 and 1 99 8, Mattel held $ 14 4.7 million and
$1 89 .1 million, respectively, of foreign currency forw ard exchange contracts to
purchase foreign currencies. The fair value of these contracts was $1 44 .9 million
and $ 20 1.8 million as of December 31 , 1999 and 19 98 , respectively. Fair value
reflects the amount, based on dealer quotes, Mattel would pay at maturity for con-
tracts involving the same currencies and maturity dates, if they had been entered into
as of year-end 1 99 9 and 19 98 , respectively.
The following table summarizes Mattel’s foreign currency contracts by major
currency as of December 31 , 1999 and 19 98 ( in thousands of US dollars) :
19 9 9 1 9 9 8
Buy Sell Buy Sell
US dollar $3 4 2 ,370 $1 4 4,70 3 $3 92,97 2 $189,1 2 2
Euro 92 ,4 4 5 2 5 3,09 6 – –
British pounds sterling 6,3 1 6 1 6 ,679 6 ,548 66 ,8 5 6
Canadian dollar 7,6 0 4 4 0 ,679 1 6 ,1 4 4 1 8,79 4
Indonesian rupiah 19 ,455 – 1 0 ,0 00 –
Japanese yen – 1 9 ,412 – 1 2 ,5 01
Swiss franc 14,8 9 3 – 18 ,3 4 1 –
Australian dollar – 8,4 38 4 ,9 8 8 2 1,61 0
Hong Kong dollar – – 5 5 ,82 9 –
French franc – – 27,43 5 9,10 5
Italian lira – – 20,0 1 4 6 8 ,358
German mark – – 19,11 9 14 4 ,6 6 0
Spanish peseta – – 5,6 2 5 2,8 9 9
Dutch guilder – – 5,0 7 9 8,0 8 6
Mexican peso – – – 2 2 ,000
Belgian franc – – – 11 ,6 4 1
Other ( under $ 5 ,00 0 ) 3,9 9 0 4,06 6 – 6,4 6 2
$4 8 7 ,0 7 3 $487,0 7 3 $ 5 8 2,09 4 $ 5 8 2 ,094
In order to minimize the risk of counterparty non-performance, Mattel
executes its foreign currency forward exchange and option contracts with financial
institutions believed to be credit-worthy, generally those that provide Mattel with its
working capital lines of credit.
Market risk exposures exist with respect to the settlement of foreign currency
transactions during the year because currency fluctuations cannot be predicted with
certainty. Mattel seeks to mitigate its exposure to market risk by monitoring its cur-
rency exchange exposure for the year and partially or fully hedging such exposure.
In addition, Mattel manages its exposure through the selection of currencies used for
international borrowings and intercompany invoicing. Mattel does not trade in finan-
cial instruments for speculative purposes.
Litigation
Power Wheels®Recall and Related Matters
On October 2 2, 1 998, Mattel announced that Fisher-Price, in cooperation with the
Consumer Product Safety Commission, would conduct a voluntary recall involving up
to 10 million battery-powered Pow er Wheels®ride-on vehicles. 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
recall involves vehicles sold nationwide since 1 98 4 under nearly 10 0 model names.
Additionally, Fisher-Price has been notified by the Consumer Product Safety Commission
that the Commission is considering whether Fisher-Price may be subject to a fine for
delayed reporting of the facts underlying the recall.
In the third quarter of 1 99 8, Mattel recognized a $3 8.0 million pre-tax
charge related to the recall. During the second and fourth quarters of 19 99 , Mattel
recognized additional pre-tax charges totaling $2 0.0 million related to the recall.
Greenwald Litigation and Related Matters
On October 1 3, 1 995, Michelle Greenwald filed a complaint ( Case No. YC 02 5 00 8)
against Mattel in Superior Court of the State of California, County of Los Angeles.
Ms. Greenwald is a former employee whom Mattel terminated in July 199 5. Her
complaint sought $5 0 million in general and special damages, plus punitive damages,
for breach of oral, written and implied contract, wrongful termination in violation of
public policy and violation of California Labor Code Section 9 70 . Ms. Greenwald