Mattel 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 Mattel annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 133

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133

Table of contents

  • Page 1

  • Page 2

  • Page 3
    ...was named Toy of the Year by the Toy Industry Association. The Fisher-Price® Friends group also benefited from nice increases in Nickelodeon's Dora the Explorer™ and Go-Diego-Go!™ properties. OUR OVERALL BUSINESS ENJOYED TERRIFIC GROWTH IN 2006 Neil Friedman, who is responsible for our Girls...

  • Page 4
    ... member of the American Girl® historical doll collection. TO BUILD GLOBALLY Finally, we see wonderful global opportunities to build the recently acquired Radica Games Limited business, makers of electronic games and toys including ™ ™ 20Q , Digi Makeover and Cube World.™ Radica® products...

  • Page 5
    CHAT DIVAS™ BARBIE® DOLL

  • Page 6
    ...from operations at $876 million. This business generates attractive levels of cash, which your Board of Directors has strategically used to invest in the growth of the business, acquire Radica,® repurchase shares (15 percent of shares outstanding since the program's inception three and a half years...

  • Page 7
    FISHER-PRICE® KID-TOUGH® DIGITAL CAMERA

  • Page 8
    ... for its commitment to corporate governance. For the third year in a row, Mattel received the highest overall global rating of 10 from GovernanceMetrics International (GMI), placing Mattel among the top 1 percent of more than 3,400 global companies. And the Board continues to rejuvenate itself...

  • Page 9
    FORM 10-K 2006

  • Page 10
    ... the market price as of the close of business June 30, 2006 was $6,276,702,226. Number of shares outstanding of registrant's common stock, $1.00 par value, as of February 23, 2007: 393,171,940 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Mattel, Inc. 2007 Notice of Annual Meeting of...

  • Page 11
    ... Controls and Procedures ...Item 9B. Other Information ...PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance of the Registrant ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder...

  • Page 12
    ... in El Segundo, California. The consolidation of these divisions did not change Mattel's operating segments. Management believes that the business environment for Mattel for 2007 will be similar to that of 2006. Mattel expects to continue facing challenges both domestically and internationally as...

  • Page 13
    ... Girls Brands. Wheels is comprised of Hot Wheels®, Matchbox®, and Tyco® R/C vehicles and playsets. Entertainment includes Batman™, CARS™, Justice League™, MegaMan™, Superman™, Yu-Gi-Oh!™, and Radica:® products, as well as games and puzzles. In 2007, Mattel expects to introduce new...

  • Page 14
    ... segment exceeded 6% of worldwide consolidated gross sales during 2006. The strength of the US dollar relative to other currencies can significantly affect the revenues and profitability of Mattel's international operations. Mattel enters into foreign currency forward exchange and option contracts...

  • Page 15
    ... Lego, MGA Entertainment, and VTech, many smaller toy companies and several manufacturers of video games and consumer electronics. American Girl Brands competes with companies that manufacture girls' toys and with children's book publishers and retailers. Mattel's International segment competes with...

  • Page 16
    ...including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers by Mattel Girls & Boys Brands US and Fisher-Price Brands US. Mattel also operates several small retail outlets, generally near or at its corporate headquarters...

  • Page 17
    ...that Mattel sells. A number of these licenses relate to product lines that are significant to Mattel's business and operations. Mattel has entered into agreements to license entertainment properties from, among others, Disney Enterprises, Inc. (including Disney characters such as Winnie the Pooh and...

  • Page 18
    ...results of operations and cash flows. Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of...

  • Page 19
    ... Offered Rate ("LIBOR") plus 40 basis points with interest payable quarterly beginning September 15, 2006. Interest on the 6.125% Senior Notes is payable semi-annually beginning December 15, 2006. The 6.125% Senior Notes may be redeemed at any time at the option of Mattel at a redemption price equal...

  • Page 20
    ... facility and simultaneous with each receivables purchase, Mattel Factoring sells those receivables to the bank group. Mattel records the transaction, reflecting cash proceeds and sale of accounts receivable in its consolidated balance sheet, at the time of the sale of the receivables to the bank...

  • Page 21
    ... SGBN. The Company determined the facility was no longer necessary based on projected international cash flows and seasonal financing needs. Government Regulations and Environmental Quality Mattel's toy products sold in the US are subject to the provisions of the Consumer Product Safety Act and the...

  • Page 22
    ... 53 46 Chairman of the Board and Chief Executive Officer Executive Vice President of Mattel and President, American Girl Executive Vice President, Worldwide Operations Chief Financial Officer President, Mattel Brands Senior Vice President, Human Resources Senior Vice President, General Counsel and...

  • Page 23
    ... Executive Officer of Basic Vegetable Products, the largest manufacturer of vegetable ingredients in the world. For more than 20 years prior to that, he was employed by Kraft Foods, Inc., the largest packaged food company in North America, and was President of Kraft North American Food Service from...

  • Page 24
    ... life cycles for individual toy products, the phenomenon of children outgrowing toys at younger ages and an increasing use of more sophisticated technology in toys. If Mattel does not successfully meet the challenges outlined above in a timely and cost-effective manner, demand for its products...

  • Page 25
    ... on Mattel's business and operating results. A small number of customers account for a large share of Mattel's net sales. In 2006, Mattel's three largest customers, Wal-Mart, Toys "R" Us and Target, in the aggregate, accounted for approximately 43% of net sales, and its ten largest customers, in...

  • Page 26
    ... time. Any such change could significantly harm Mattel's business and operating results. The production and sale of private-label toys by Mattel's retail customers may result in lower purchases of Mattel-branded products by those retail customers. In recent years, consumer goods companies generally...

  • Page 27
    ... its trademarks, trade names, copyrights, patents and trade secrets in the US and around the world, as well as its customer, employee and consumer data. Any failure by Mattel to protect its proprietary intellectual property and information, including any successful challenge to Mattel's ownership of...

  • Page 28
    ... in Hong Kong, and in the Guangdong province of China, where many of Mattel's manufacturing facilities and third-party manufacturers are located. The design, development and manufacture of Mattel's products could suffer if a significant number of Mattel's employees or the employees of its...

  • Page 29
    ... and extend Mattel's brands, catch new trends, create new brands and offer new innovative toys, develop people, improve productivity, simplify processes, maintain customer service levels, as well as new initiatives designed to drive sales growth, manage costs and improve its supply chain. These...

  • Page 30
    ..., whether as a result of new developments or otherwise. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Mattel owns its corporate headquarters in El Segundo, California, consisting of approximately 335,000 square feet, and an adjacent office building consisting of approximately 55,000...

  • Page 31
    ... used by the International segment. Mattel's principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia and Mexico. See "Manufacturing and Materials." For leases that are scheduled to expire during the next twelve months, Mattel may negotiate new lease agreements, renew...

  • Page 32
    ... stock is at the discretion of Mattel's Board of Directors and is subject to customary limitations. Securities Authorized for Issuance under Equity Compensation Plans The information regarding Mattel's equity compensation plans is incorporated herein by reference to Mattel's 2007 Notice of Annual...

  • Page 33
    ... Mattel's consolidated statements of operations. Close out sales for the fourth quarter of 2003, totaling $19.2 million, were included in reported net sales. This change in classification had no impact on gross profit, operating income, net income, net income per common share, balance sheets or cash...

  • Page 34
    ... markets a broad variety of toy products worldwide through sales to its customers and directly to consumers. Mattel's business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines, to design and develop innovative new products...

  • Page 35
    ... in El Segundo, California. The consolidation of these divisions did not change Mattel's operating segments. Management believes that the business environment for Mattel in 2007 will be similar to that of 2006. Mattel expects to continue facing challenges both domestically and internationally as...

  • Page 36
    ... in international markets increased 11% compared to 2005, including a 2 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Mattel Girls & Boys Brands increased 9% to $3.42 billion in 2006 compared to 2005, including fourth quarter sales of Radica:® products...

  • Page 37
    ... Batmanâ„¢ and Yu-Gi-Oh!â„¢ products. Worldwide gross sales of Fisher-Price Brands increased 12% to $2.27 billion in 2006 compared to 2005, including a 1 percentage point benefit from changes in currency exchange rates. Domestic gross sales increased 8%, while international gross sales increased 20...

  • Page 38
    ... product lines. Gross sales in the Entertainment category, which includes games and puzzles and Radica:® products, increased 61% driven by the success of CARS™ and Superman™ products and Radica:® products, which more than offset sales declines in Batman™ and Yu-Gi-Oh!™. Mattel Girls & Boys...

  • Page 39
    ...driven by increased sales of Polly Pocket!™, Pixel Chix™ and Winx Club™. Gross sales in the Wheels category grew by 7%, including a 2 percentage point benefit from changes in currency exchange rates, mainly driven by the success of Hot Wheels® and Matchbox® products, partially offset by Tyco...

  • Page 40
    ... in 2005 compared to 58% in 2004. In 2005, gross sales in international markets increased 5% compared to 2004, including a 1 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Mattel Girls & Boys Brands decreased 3% to $3.14 billion in 2005 compared to 2004...

  • Page 41
    ..., and Winx Club™ in international markets. Worldwide gross sales in the Wheels category decreased 1% compared to 2004, including a 2 percentage point benefit from changes in currency exchange rates. International gross sales increases in the Hot Wheels® and Tyco® R/C product lines were more than...

  • Page 42
    ...Operating Segment Results Mattel's operating segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US and American Girl Brands. Operating...

  • Page 43
    ...™ and Yu-Gi-Oh!™ properties. Fisher-Price Brands gross sales increased 11%, including a 1 percentage point benefit from changes in currency exchange rates, due to strong growth in Core Fisher-Price® products, primarily infant and BabyGear™ lines, and Fisher-Price® Friends, mainly Dora the...

  • Page 44
    ... cash balances and access to short-term borrowing facilities. Cash flows from operations could be negatively impacted by decreased demand for Mattel's products, which could result from factors such as adverse economic conditions and changes in public and consumer preferences, or by increased costs...

  • Page 45
    requirements, mainly due to payments made in 2005 related to year-end 2004 accruals to vendors and foreign tax authorities. Investing Activities On October 3, 2006, Mattel completed its acquisition of Radica for net cash paid of $196.4 million, which includes the purchase price and acquisition costs...

  • Page 46
    ... Offered Rate ("LIBOR") plus 40 basis points with interest payable quarterly beginning September 15, 2006. Interest on the 6.125% Senior Notes is payable semi-annually beginning December 15, 2006. The 6.125% Senior Notes may be redeemed at any time at the option of Mattel at a redemption price equal...

  • Page 47
    ... in the interest payments due to fluctuations of the LIBOR benchmark interest rate. These cash flow hedges are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, whereby the hedges are reported in Mattel's consolidated balance sheets at fair value, with...

  • Page 48
    ... necessary based on projected international cash flows and seasonal financing needs. The outstanding amounts of accounts receivable that have been sold under these facilities and other factoring arrangements, net of collections from customers, have been excluded from Mattel's consolidated balance...

  • Page 49
    ... in the first quarter of 2007. Inventory levels were relatively consistent year over year. Based on its analysis of point of sale information for its top US customers, management believes that inventory levels of Mattel products at retail were slightly lower at December 31, 2006 than 2005. Current...

  • Page 50
    ...In the normal course of business, Mattel enters into debt agreements, contractual arrangements to obtain and protect Mattel's right to create and market certain products, and for future purchases of goods and services to ensure availability and timely delivery. These arrangements include commitments...

  • Page 51
    ...day. Neither Bryant nor the MGA defendants have responded to the counterclaims. Environmental Beaverton, Oregon Mattel previously operated a manufacturing facility on a leased property in Beaverton, Oregon that was acquired as part of the March 1997 merger with Tyco Toys, Inc. In March 1998, samples...

  • Page 52
    ... funds to the Mattel Stock Fund, which allows employees to limit or eliminate their exposure to market changes in Mattel's stock price. Furthermore, Mattel's plan limits an employee's maximum allocation to the Mattel Stock Fund a percentage of the employee's total account balance, which is currently...

  • Page 53
    ...beyond the control of Mattel. This could increase Mattel's exposure to losses from bad debts. On a consolidated basis, a small number of customers account for a large share of Mattel's net sales and accounts receivable. For 2006, Mattel's three largest customers, Wal-Mart, Toys "R" Us and Target, in...

  • Page 54
    ... of Mattel's inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in the buying patterns of both retailers and consumers and inventory management of customers. In the toy industry, orders are subject to cancellation or change at any time prior...

  • Page 55
    ... economic changes may affect the sales of Mattel's products and its corresponding inventory levels, which would potentially impact the valuation of its inventory. At the end of each quarter, management within each business segment, Mattel Girls & Boys Brands US, Fisher-Price Brands US, American Girl...

  • Page 56
    ...segment, for purposes of evaluating whether goodwill is impaired. Mattel's reporting units for are: Mattel Girls Brands US, Mattel Boys Brands US (including newly acquired Radica), Fisher-Price Brands US, American Girl Brands and International. Goodwill is allocated to Mattel's reporting units based...

  • Page 57
    ... of plan income or expense. The long-term rate of return on plan assets is based on management's expectation of earnings on the assets that secure Mattel's funded defined benefit pension plans, taking into account the mix of invested assets, the arithmetic average of past returns, economic and stock...

  • Page 58
    ...a one percentage point increase/(decrease) would impact the service and interest cost recognized for 2006 by approximately $0.3 million and $(0.2) million, respectively. Share-Based Payments Prior to January 1, 2006, Mattel accounted for its employee stock compensation plans based on the recognition...

  • Page 59
    ..., for financial reporting purposes, there may be other potential tax benefits derived from accelerating the vesting of stock options. Due to the acceleration of vesting in 2005, future share-based payment grants are expected to impact Mattel's consolidated statements of operations more significantly...

  • Page 60
    ... 2006, no compensation expense was recognized in the consolidated statements of operations for stock options. Compensation expense recognized related to grants of restricted stock and restricted stock units ("RSUs") to certain employees and non-employee Board members was $3.6 million during the year...

  • Page 61
    ... and 2005 tax years. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel's consolidated financial statements. New Accounting Pronouncements SFAS No. 156 In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of...

  • Page 62
    ... GAAP financial measure, net sales, is as follows (in thousands): 2006 For the Year 2005 2004 Revenues Domestic: Mattel Girls & Boys Brands US ...Fisher-Price Brands US ...American Girl Brands ...Total Domestic ...International ...Gross sales ...Sales adjustments ...Net sales ... $1,507,493 1,471...

  • Page 63
    ... for Mattel during 2006, 2005, and 2004. Mattel seeks to mitigate its exposure to market risk by monitoring its currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange and option contracts primarily to hedge its purchase and sale of...

  • Page 64
    ... December 31, 2006, these contracts had a contract amount of $57.6 million and a fair value of $58.9 million. Had Mattel not entered into hedges to limit the effect of currency exchange rate fluctuations on its results of operations and cash flows, its income before income taxes would have decreased...

  • Page 65
    .... PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited management's assessment of the effectiveness of Mattel's internal control over financial reporting as of December 31, 2006 as stated in their report which is included in this Annual Report on Form 10-K. 56

  • Page 66
    ... the year ended December 31, 2006, Mattel, Inc. changed the manner in which it accounts for stock compensation costs and the manner which it accounts for defined benefit pension and other postretirement plans. Internal control over financial reporting Also, in our opinion, management's assessment...

  • Page 67
    ... preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately...

  • Page 68
    ..., except share data) ASSETS Current Assets Cash and equivalents ...Accounts receivable, less allowances of $19.4 million and $24.6 million in 2006 and 2005, respectively ...Inventories ...Prepaid expenses and other current assets ...Total current assets ...Property, plant and equipment, net...

  • Page 69
    MATTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Year 2006 2005 2004 (In thousands, except per share amounts) Net Sales ...Cost of sales ...Gross Profit ...Advertising and promotion expenses ...Other selling and administrative expenses ...Operating Income ...Interest ...

  • Page 70
    ... cash flows from operating activities: Gain on sale of investments ...Net (gain) on sale of other property, plant and equipment ...Depreciation ...Amortization ...Deferred income taxes ...Share-based compensation ...Increase (decrease) from changes in assets and liabilities: Accounts receivable, net...

  • Page 71
    ... net unrealized (loss) on derivative instruments ...Minimum pension liability adjustments ...Currency translation adjustments ...Comprehensive income ...Purchase of treasury stock ...Issuance of treasury stock for stock option exercises ...Other issuance of treasury stock ...Share-based compensation...

  • Page 72
    ... no marketable securities at December 31, 2006 and 2005. Accounts Receivable and Allowance for Doubtful Accounts Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on extensive evaluations made on an ongoing basis throughout the fiscal year of...

  • Page 73
    ... the operating segment level or one reporting level below the operating segment for purposes of evaluating whether goodwill is impaired. Mattel's reporting units are: Mattel Girls Brands US, Mattel Boys Brands US, Fisher-Price Brands US, American Girl Brands and International. Mattel tests goodwill...

  • Page 74
    ... involved, Mattel does not use hedge accounting for these contracts. Changes in fair value of these derivatives were not significant to the results of operations during any year. Revenue Recognition and Sales Adjustments Revenue is recognized upon shipment or upon receipt of products by the customer...

  • Page 75
    ... for retirement and other postretirement benefit plans (see "Note 4 to the Consolidated Financial Statements"). Share-Based Payments Prior to January 1, 2006, Mattel accounted for its employee stock compensation plans based on the recognition and measurement principles of Accounting Principles Board...

  • Page 76
    ... was to avoid recognizing future compensation expense associated with the accelerated stock options under the adoption of SFAS No. 123(R), Share-Based Payment, by Mattel in 2006. Additionally, for financial reporting purposes, there were other potential tax benefits derived from accelerating the...

  • Page 77
    ..., 2006, total unrecognized compensation cost related to unvested share-based payments totaled $29.3 million and is expected to be recognized over a weighted-average period of 2.5 years. Income Taxes Certain income and expense items are accounted for differently for financial reporting and income tax...

  • Page 78
    ... earnings upon adoption of FIN 48. FIN 48 also requires that amounts recognized in the balance sheet related to uncertain tax positions be classified as a current or noncurrent liability, based upon the timing of the ultimate payment to a taxing authority. Mattel currently records tax reserves...

  • Page 79
    ...to the US reporting units. Mattel Girls Brands US Division Mattel Boys Brands US Division Fisher-Price American Girl Brands US Brands (In thousands) International Total Balance at December 31, 2004 ...$ Impact of currency exchange rate changes ...Balance at December 31, 2005 ...Radica acquisition...

  • Page 80
    ... for tax credit carryforwards, net operating loss carryforwards, research and development expenses, depreciation, employee compensation-related expenses and certain other reserves that are recognized in different years for financial reporting and income tax reporting purposes. Mattel's deferred...

  • Page 81
    ...tax authorities may challenge Mattel's nexus activities and apportionment among entities and jurisdictions; and issues identified in current income tax audits. Mattel will adopt FIN 48 as of January 1, 2007. In 2006, Mattel recognized total income tax benefits of $63.0 million related to settlements...

  • Page 82
    ... based on the status of current audits in various jurisdictions around the world. In 2004, Mattel reached a settlement with the Internal Revenue Service ("IRS") regarding the examination of Mattel's US federal income tax returns for the years 1998 through 2001. The settlement resulted in a net...

  • Page 83
    ... Benefit Pension Plans 2006 2005 2004 Postretirement Benefit Plans 2006 2005 2004 Service cost ...Interest cost ...Expected return on plan assets ...Amortization of prior service cost ...Recognized actuarial loss ...Net periodic benefit cost ...Special termination benefits ...Net benefit cost...

  • Page 84
    ... pension plans: ...Discount rate ...Weighted average rate of future compensation increases ...Long-term rate of return on plan assets ...Postretirement benefit plans: ...Discount rate ...Annual increase in Medicare Part B premium ...Health care cost trend rate: ...Pre-65 ...Post-65 ...Ultimate...

  • Page 85
    ...) (3,722) Plan assets at fair value, end of year ...$ 325,763 $ 296,564 $ - $ - Net Amount Recognized in Consolidated Balance Sheets Funded status, end of year ...$(136,623) $(169,889) $(50,046) $(59,938) Unrecognized actuarial loss ...N/A 178,215 N/A 23,970 Unrecognized prior service cost ...N/A 17...

  • Page 86
    ... 31, 2006 2005 Defined benefit pension plans: Discount rate ...Weighted average rate of future compensation increases ...Postretirement benefit plans: Discount rate ...Annual increase in Medicare Part B premium ...Health care cost trend rate: Pre-65 ...Post-65 ...Ultimate cost trend rate (pre...

  • Page 87
    ... and court cases associated with cash balance plans and submitted a new application for a determination letter to the IRS. Mattel plans to convert The Fisher-Price Pension Plan to a cash balance plan upon receipt of a determination letter. Defined Contribution Retirement Plans Domestic employees are...

  • Page 88
    ... balance sheets. Incentive Compensation Plans Mattel has annual incentive compensation plans under which officers and key employees may earn incentive compensation based on Mattel's performance and subject to certain approvals of the Compensation Committee of the Board of Directors. For 2006...

  • Page 89
    ... Offered Rate ("LIBOR") plus 40 basis points with interest payable quarterly beginning September 15, 2006. Interest on the 6.125% Senior Notes is payable semi-annually beginning December 15, 2006. The 6.125% Senior Notes may be redeemed at any time at the option of Mattel at a redemption price equal...

  • Page 90
    ... by an estimate of the cost of servicing the trade receivables sold. The fair value of the net servicing asset totaled $2.3 million at December 31, 2006. Until the Master Agreement was terminated on February 9, 2007, Mattel International Holdings B.V., a company incorporated in the Netherlands (the...

  • Page 91
    ... nature. The fair value of the net servicing asset was based on an estimate of interest Mattel would earn on cash collections prior to remitting the funds to the purchaser, partially offset by an estimate of the cost of servicing the trade receivables sold. The net servicing asset for the European...

  • Page 92
    ... due June 15, 2011. In June 2006, Mattel entered into two interest rate swap agreements on the $100.0 million Floating Rate Senior Notes, each in a notional amount of $50.0 million, for the purpose of hedging the variability of cash flows in the interest payments due to fluctuations of the LIBOR...

  • Page 93
    ... of each year. The payment of dividends on common stock is at the discretion of Mattel's Board of Directors and is subject to customary limitations. Comprehensive Income (Loss) The changes in the components of other comprehensive income (loss), net of tax, are as follows (in thousands): 2006 For the...

  • Page 94
    ... fair market value during a specified time period. Options were granted to non-employee members of Mattel's Board of Directors under the 1996 Plan with exercise prices equal to the fair market value of Mattel's common stock on the date of grant; such options expire no later than ten years from...

  • Page 95
    ... share-based payments totaled $29.3 million and is expected to be recognized over a weighted-average period of 2.5 years. Stock Option Review In August 2006, two derivative shareholder lawsuits were filed against Mattel and certain of its past and present executive officers and members of its Board...

  • Page 96
    ... before income taxes and net income for the year ended December 31, 2006, are $4.6 million and $2.9 million lower, respectively, than if Mattel had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for the year ended December 31, 2006 are $0.01...

  • Page 97
    ... risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues. The following weighted average assumptions were used in determining fair value for options granted: 2006 2005 2004 Options granted at market price Expected life (in years) ...Risk-free interest rate...

  • Page 98
    ... benefits for eligible employees and non-employee directors. Effective with the 1999 merger, each option outstanding under these plans was converted into an option to purchase 1.2 shares of Mattel common stock. The exercise price of such options was adjusted by dividing the Learning Company option...

  • Page 99
    ... Stock Units Compensation expense recognized related to grants of restricted stock and RSUs to certain employees and non-employee Board members was $3.6 million for the year ended December 31, 2006. The following table summarizes the number and weighted average grant date fair value of Mattel...

  • Page 100
    ...the lessors for operating expenses such as real estate taxes, maintenance, utilities and insurance. Rental expense is recorded on a straight-line basis, including escalating minimum payments. The American Girl Place® leases in Chicago, Illinois, New York, New York, and Los Angeles, California, also...

  • Page 101
    ... in 2006, 2005 and 2004, respectively. Commitments In the normal course of business, Mattel enters into contractual arrangements to obtain and protect Mattel's right to create and market certain products, and for future purchases of goods and services to ensure availability and timely delivery...

  • Page 102
    ...March 7, 2007 for oral arguments. Mattel and its subsidiary Fisher-Price continue to believe the action is without merit and intend to continue defending themselves vigorously. Litigation Related to Carter Bryant and MGA Entertainment, Inc. In April 2004, Mattel filed a lawsuit in Los Angeles County...

  • Page 103
    ... Polly Pocket!™, Pixel Chix™, Winx Club™ and Disney Classics (collectively "Other Girls Brands"), Hot Wheels®, Matchbox® and Tyco® R/C vehicles and playsets (collectively "Wheels") and Batman™, CARS™, Superman™, Radica:® products and games and puzzles (collectively "Entertainment...

  • Page 104
    ... compensation and corporate headquarters functions managed on a worldwide basis and the impact of changes in foreign currency rates on intercompany transactions. 2006 For the Year 2005 (In thousands) 2004 Revenues Domestic: Mattel Girls & Boys Brands US ...Fisher-Price Brands US ...American Girl...

  • Page 105
    ..., Fisher-Price Brands and American Girl Brands. The table below presents worldwide revenues by category: 2006 For the Year 2005 (In thousands) 2004 Worldwide Revenues Mattel Girls & Boys Brands ...Fisher-Price Brands ...American Girl Brands ...Other ...Gross sales ...Sales adjustments ...Net sales...

  • Page 106
    ... 0.8 0.5 The Mattel Girls & Boys Brands US and Fisher-Price Brands US segments sell products to each of Mattel's three largest customers. The International segment sells products to Wal-Mart and Toys "R" Us. The American Girl Brands segment sells its children's publications to Wal-Mart and Target...

  • Page 107
    ...the Year 2005 (In thousands) 2004 Currency transaction (gains)/losses included in: Operating income ...Other non-operating expense (income), net ...Net transaction (gains) ...Other selling and administrative expenses include the following: Design and development ...Bad debt expense ...Identifiable...

  • Page 108
    ... acquired of $38.7 million. Radica manufactures and markets a diverse line of electronic entertainment products including electronic games carrying the Radica:®, 20Q™, Cube World™, and Play TV® brand names and youth electronics carrying the Girl Tech® brand name. Under the Agreement and Plan...

  • Page 109
    ... common share ...$ Common stock market price: High ...$ Low ...Year Ended December 31, 2005 Net sales ...Gross profit ...Advertising and promotion expenses ...Other selling and administrative expenses ...Operating income ...Income before income taxes ...Net income (loss) (c) ...Net income (loss) per...

  • Page 110
    ..."Financial Statements and Supplementary Data--Management's Report on Internal Control over Financial Reporting." Changes in Internal Control Over Financial Reporting Mattel continues to implement a conversion to new and upgraded financial and human resources information technology systems that began...

  • Page 111
    ... Directors on its corporate website at http://www.mattel.com. Copies of the corporate governance guidelines and committee charters may be obtained free of charge by mailing a request to the address noted above. Mattel has filed the certification of its Chief Executive Officer with the New York Stock...

  • Page 112
    ... Data." Page Management's Report on Internal Control over Financial Reporting ...Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2006 and 2005 ...Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and...

  • Page 113
    ... Debt Securities Underwriting Agreement dated June 8, 2006, between Mattel and Banc of America Securities LLC and Citigroup Global Markets Inc. Form of Floating Rate Notes due June 15, 2009 Form of 6.125% Notes due June 15, 2011 Third Amended and Restated Credit Agreement dated as of March...

  • Page 114
    ...23, 2005, among Mattel Factoring, Inc., as Transferor, Mattel, Inc., as Servicer, Bank of America, N.A., as Administrative Agent, and the financial institutions party thereto Credit Agreement dated as of December 9, 2005, among Mattel Asia Pacific Sourcing Limited, as Borrower, Mattel, Inc., Bank of...

  • Page 115
    ... 001-05647 99.0 February 9, 2007 Executive Compensation Plans and Arrangements of Mattel 10.16 Form of Indemnity Agreement between Mattel and its directors and certain of its executive officers Executive Employment Agreement dated October 18, 2000 between Mattel and Robert A. Eckert Amendment to...

  • Page 116
    ... Executive Retirement Plan Executive Employment Agreement dated January 31, 2000 between Mattel and Neil B. Friedman Amendment to Employment Agreement dated November 14, 2000 between Mattel and Neil B. Friedman Amendment to Employment Agreement and Stock Option Grant Agreements between Mattel and...

  • Page 117
    ... Plan for NonEmployee Directors Mattel, Inc. Amended & Restated Supplemental Executive Retirement Plan as of May 1, 1996 Amendment No. 1 to Mattel, Inc. Amended & Restated Supplemental Executive Retirement Plan Mattel, Inc. 2005 Supplemental Executive Retirement Plan The Fisher-Price Pension Plan...

  • Page 118
    ...the Fisher-Price Pension Plan Ninth Amendment to the Fisher-Price Pension Plan Tenth Amendment to the Fisher-Price Pension Plan The Fisher-Price Section 415 Excess Benefit Plan Mattel, Inc. Personal Investment Plan, January 1, 2006 Restatement Mattel, Inc. Amended and Restated 1990 Stock Option Plan...

  • Page 119
    ... Outside Directors (Annual Grant) under the 1996 Plan, as amended Form of Option Grant Agreement (Three Year Vesting) under the 1996 Plan, as amended Form of Grant Agreement for a Restricted Stock Grant under the Mattel, Inc. 1996 Stock Option Plan Mattel, Inc. 1997 Premium Price Stock Option Plan...

  • Page 120
    ...Date 10.88 Form of Grant Agreement for August 1, 2006 grants to employees of NQSOs under the 2005 Plan Form of Grant Agreement for August 1, 2006 grants to employees of Restricted Stock Units with Dividend Equivalents ("RSUs") under the 2005 Plan Form of Grant Agreement for August 1, 2005 grant to...

  • Page 121
    ... under the 2005 Plan Form of Grant Agreement for May 11, 2006 Annual Grants to Outside Directors of RSUs under the 2005 Plan Mattel, Inc. Key Executive Life Insurance Plan (for Robert A. Eckert) Mattel, Inc. Summary of Compensation of the Non-Employee Members of the Board of Directors Computation of...

  • Page 122
    ... stockholders of Mattel without charge. Copies of other exhibits can be obtained by stockholders of Mattel upon payment of twelve cents per page for such exhibits. Written requests should be sent to: Secretary, Mail Stop M1-1516, Mattel, Inc., 333 Continental Blvd., El Segundo, California 90245-5012...

  • Page 123
    ... has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MATTEL, INC. Registrant By: /s/ KEVIN M. FARR Kevin M. Farr Chief Financial Officer Date: February 26, 2007 POWER OF ATTORNEY We, the undersigned directors and officers of Mattel, Inc. do hereby...

  • Page 124
    ... Ng ANDREA L. RICH Andrea L. Rich RONALD L. SARGENT Ronald L. Sargent Director February 26, 2007 Director February 26, 2007 /s/ Director February 26, 2007 /s/ Director February 26, 2007 /s/ CHRISTOPHER A. SINCLAIR Christopher A. Sinclair /s/ G. CRAIG SULLIVAN G. Craig Sullivan JOHN...

  • Page 125
    ... II MATTEL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND ALLOWANCES Balance at Beginning of Year Additions Charged to Net Operations Deductions (In thousands) Balance at End of Year Allowance for Doubtful Accounts Year ended December 31, 2006 ...Year ended December 31, 2005 ...Year...

  • Page 126
    ... BASIC 2006 For the Year 2005 2004 2003 (In thousands, except per share amounts) 2002 Income from continuing operations ...$592,927 $417,019 $572,723 $537,632 $ 455,042 Gain from discontinued operations, net of tax ...- - - - 27,253 Cumulative effect of change in accounting principles, net of tax...

  • Page 127
    ... MATTEL, INC. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Unaudited; in thousands, except ratios) 2006 2005 For the Year 2004 2003 2002 Earnings Available for Fixed Charges: Income from continuing operations before income taxes and cumulative effect of changes in accounting...

  • Page 128
    ... the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act...

  • Page 129
    ... the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act...

  • Page 130
    ...an initial investment of $100 on December 31, 2001 and reinvestment of dividends. Comparison of Five Year Cumulative Total Return Mattel, Inc., S&P 500 and S&P 500 Consumer Staples Index 2001 to 2006 200 Mattel, Inc. $146.38 150 DOLLARS S&P 500 Consumer Staples Index $136.69 S&P 500 $134.43 100...

  • Page 131
    ... Ellen L. Brothers Executive Vice President of Mattel and President, American Girl Neil B. Friedman President, Mattel Brands Bryan G. Stockton Executive Vice President, International Dr. Andrea L. Rich (3) (4) Former President, Chief Executive Officer and Director, Los Angeles County Museum of Art...

  • Page 132

  • Page 133