Mattel 2001 Annual Report Download - page 23

Shortages of raw materials or components also may affect Mattel’s ability to produce products in time to meet
retailer demand. These factors increase the risk that Mattel may not be able to meet demand for certain
products at peak demand times, or that Mattel’s own inventory levels may be adversely impacted by the need to
pre-build products before orders are placed.
Adverse General Economic Conditions
Mattel’s results of operations may be negatively affected by adverse changes in general economic
conditions in the US and internationally, including adverse changes in the retail environment. These adverse
changes may be as a result of softening global economies, wavering consumer confidence caused by the threat
or occurrence of terrorist attacks such as those in the US on September 11, 2001, or other factors affecting
economic conditions generally. Such changes may negatively affect the sales of Mattel’s products, increase
exposure to losses for bad debt, or increase costs associated with manufacturing and distributing these products.
Customer Concentration
A small number of Mattel’s customers account for a large share of net sales. For the year ended December
31, 2001, Mattel’s three largest customers, Wal-Mart, Toys ‘R Us and Target, in the aggregate accounted for
approximately 50% of net sales, and the ten largest customers in the aggregate accounted for approximately
64% of net sales. The concentration of Mattel’s business with a relatively small number of customers may
expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to significantly
reduce purchases for any reason. In addition, some large chain retailers have begun to sell private-label toys
designed and branded by the retailers themselves. Such toys may be sold at prices lower than comparable toys
sold by Mattel, and may result in lower purchases of Mattel-branded products by such retailers.
Rationalization of Mass Market Retail Channel and Bankruptcy of Key Customers
Many of Mattel’s key customers are mass market retailers. The mass market retail channel has experienced
significant shifts in market share among competitors in recent years, causing some large retailers to experience
liquidity problems. In 2001 and 2002, two large customers of Mattel filed for bankruptcy. Mattel’s sales to
customers are typically made on credit without collateral. There is a risk that customers will not pay, or that
payment may be delayed, because of bankruptcy or other factors beyond the control of Mattel. This could
increase Mattel’s exposure to losses from bad debts. In addition, if these or other customers were to cease
doing business as a result of bankruptcy, it could have a material adverse affect on Mattel’s business, financial
condition and results of operations.
Litigation and Disputes
Mattel is involved in a number of litigation matters, including purported securities class action claims
stemming from the merger with The Learning Company and the performance of the Learning Company
division in the second half of 1999. An unfavorable resolution of the pending litigation could have a material
adverse effect on Mattel’s financial condition. The litigation may result in substantial costs and expenses and
significantly divert the attention of Mattel’s management regardless of the outcome. There can be no assurance
that Mattel will be able to achieve a favorable settlement of the pending litigation or obtain a favorable
resolution of such litigation if it is not settled. In addition, current and future litigation, governmental
proceedings, labor disputes or environmental matters could lead to increased costs or interruptions of normal
business operations of Mattel.
Protection of Intellectual Property Rights
The value of Mattel’s business depends to a large degree on its ability to protect its intellectual property,
including its trademarks, trade names, copyrights, patents and trade secrets in the US and around the world.
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