Mattel, Inc. 333 Continental Boulevard El Segundo, California 90245 .Refocus. MATTEL, INC. 2000 ANNUAL REPORT one To our shareholders MATTEL EXPERIENCED SIGNIFICANT CHANGE DURING 2000 AND WE HAVE ALSO MADE PROGRESS TOWARDS RESTORING THE STRENGTH OF OUR BUSINESS. The most visible change occurred in the company’s Joe Eckroth, our Chief Information leadership. In May, I joined Mattel as Chairman of Officer, came to Mattel in August from General the Board and Chief Executive Officer after spend- Electric Company, and is leading our global ing 23 years at Kraft Foods, most recently as Kraft’s information technology functions and e-business President and Chief Executive Officer. After 10 initiatives. As Executive Vice President of months, I can say that I am truly delighted to have Business Planning and Development since made the decision to join Mattel. It is a pleasure to November, Bryan Stockton, a 24-year veteran work for a company with such incredible brands and of the food industry, is devoting his efforts to talented people. Clearly, I believe we have a promis- developing strategies that will help us refocus on ing future ahead of us. our core toy business. And Tom Debrowski, I also am fortunate to have very skilled Executive Vice President, Worldwide Operations, leaders as part of the senior management team. is a global manufacturing and logistics executive In addition to Mattel veterans Adrienne Fontanella, with 29 years of experience, primarily at The President, Girls/Barbie; Matt Bousquette, President, Pillsbury Company. He also joined us in November, Boys/Entertainment; Neil Friedman, President, and is responsible for overseeing our procurement, Fisher-Price Brands, and Kevin Farr, Chief Financial manufacturing and distribution functions. Both Officer, we recruited three new executives who will individually and collectively, these well-seasoned help us strengthen our business and execute our executives are experts in their fields who are growth strategy. focused on delivering outstanding results. two Our first priority as a management team was while Vivendi Universal Publishing and THQ pro- to articulate a vision that defined success for Mattel, vide software development and distribution expertise. and to establish strategies that would support that As licensing agreements, these partnerships enable us vision. Simply stated, our vision is to create and to improve earnings as royalties grow, and require no market “the world’s premier toy brands for today capital investment. This strategy for extending into and tomorrow.” We intend to reach our vision by the interactive segment will provide attractive oppor- building brands, cutting costs, developing people tunities for growth going forward. and keeping our promises. For 2000, Mattel’s domestic sales increased “Refocus” is the one word we chose to use 4 percent, while international sales declined 3 percent on the cover of this annual report, because – in one due to foreign exchange rates. In local currency, our word – it describes our mission going forward. Our international sales grew 6 percent for the year. new vision refocuses Mattel on its core business – Worldwide sales for our major brands increased across toys; its core competency – building brands; its all divisions: Barbie grew by 5 percent; Hot Wheels opportunity for global growth, and its leadership was up 2 percent; American Girl advanced 7 percent, position with children and their parents. and Fisher-Price posted a strong 26 percent gain. Consistent with our strategy of returning to In the United States, the world’s largest toy our roots, we sold The Learning Company in market, sales within the Girls division grew 10 per- October to Gores Technology Group. The Learning cent, led by 9 percent growth in Barbie and the suc- Company was not a good fit with Mattel, and it cessful launch of new products, including Diva quickly became clear that we did not need to own a Starz. Sales in our Infant and Preschool division software company in order to capitalize on the grew 3 percent as strong core Fisher-Price perfor- growth potential of the interactive games category. mance offset weakness in licensed character brands. To ensure our continued participation in this impor- Our domestic Wheels business, which includes tant segment, in January of this year we forged Hot Wheels, Matchbox and Tyco R/C, gained worldwide licensing partnerships with two leaders in market share. However, sales fell slightly below the interactive arena – Vivendi Universal Publishing year-ago levels as relatively high retail inventories and THQ. These partnerships are consistent with were adjusted down throughout 2000. our brand building strategy, in which Mattel provides As expected, our U.S. Entertainment business the content from its vast library of power brands, declined from record 1999 sales related to Toy Story 2 three movie-related products. Additionally, we restruc- Throughout the company, we are increasing tured our relationship with Disney in 2000 to focus our focus on profitability and cost reduction. Our on infant and preschool products, which is a more margins have deteriorated in recent years, and we profitable business for us. Finally, we introduced our intend to reverse that trend. To jump start our cost Harry Potter products late in 2000, which registered reduction initiative, we announced a financial realign- strong sales during the holiday season, and we are ment plan in September, which will achieve $200 optimistic about the potential of these products million in savings during the next three years. Early given the upcoming worldwide release of the first progress is on-track with the established targets. Harry Potter movie in the fall of 2001. The deployment of our cash flow has also Looking at our international performance, been scrutinized. As a result, 2000 capital spending our business in Europe, the world’s second largest was cut and we took the painful action of reducing toy market, grew slightly in local currencies, revers- the dividend paid to shareholders. The cash we save ing a four-year decline. Latin America sales grew at will be used to reduce debt, and thereby strengthen double-digit rates for the year, led by exceptional our balance sheet, providing substantial benefits to performance in Mexico. Our Canadian business, shareholders in the years to come. benefiting from new strategies, also performed well Going forward, we will not only invest in to achieve nearly double-digit growth. While more our brands, we will also invest in our people. It work needs to be done to complete the turnaround takes talented people to innovate and execute better of our international business, we are increasingly than the competition, and we are fortunate to have confident about our future, as second-half 2000 the very best employees in the toy industry. In order sales advanced 10 percent in local currencies, follow- to achieve this objective, we recently launched a new, ing two years of decline. comprehensive Strategic Plan for Human Resources, For 2000, worldwide income from continu- a first in Mattel’s history. ing operations was $293.3 million or $0.69 per We also added depth to the Board of share, excluding restructuring and non-recurring Directors, with the election in 2000 of board mem- charges, compared with $326.7 million or $0.76 per bers Eugene Beard and Ralph Whitworth, and the share in 1999. Including non-recurring charges, recently announced election of G. Craig Sullivan, full-year earnings per share from continuing opera- Chairman and Chief Executive Officer of The tions were $0.40. Clorox Company. The Board supports strong four corporate governance principles and management I am honored to lead Mattel. When I joined accountability for enhancing shareholder value. the company in May, I committed to building our Finally, focusing our efforts to ensure indus- brands, cutting costs and developing our people. try leadership for Mattel is paramount. Therefore, We have subsequently turned those objectives into we are committed to helping improve the communi- action, and have refocused the company on strategies ties we serve. We continue to advance our work that have historically provided top-tier returns to with the Mattel Independent Monitoring Council shareholders across the entire consumer goods sector. (MIMCO), whose role is to develop standards for We have defined success for Mattel and, working conditions and to monitor the performance most important, you have my unwavering commit- of our plants around the world in meeting those ment to achieving it. standards. In response to MIMCO’s recommenda- tions, we have made new capital investments in Sincerely, China. And our charitable support allows the Mattel Children’s Hospital at UCLA to continue its pioneering research while beginning construction of a new, world-class facility. Robert A. Eckert Looking ahead, we have four priorities for Mattel: Chairman of the Board and Chief Executive Officer 1. To strengthen core brand momentum in the U.S. and abroad; March 22, 2001 2. To execute the financial realignment plan, and deliver the cost savings announced in September; 3. To improve supply chain performance and customer service levels; and 4. To develop our people, and improve our employee development processes. Strategy. Robert A. Eckert Chairman and Chief Executive Officer six Improve. THE IMPROVED EXECUTION OF OUR EXISTING TOY BUSINESS WILL HELP TO INCREASE PROFITABILITY OVER THE LONG TERM. Mattel’s success depends on more than just great made up of employees who are working with toys. We will succeed by having the right product our top customers to identify and implement in the right place at the right time, and always improvements in all elements of the supply chain, doing it in such a way that we maximize profitabil- from Product Planning to Manufacturing to ity, since this is our first priority. Distribution, as well as Finance, Information We are committed to improving the execu- Technology and Sales.