Mattel 2003 Annual Report Download - page 68

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Income Per Common Share
Basic income (loss) per common share is computed by dividing reported net income by the weighted
average number of common shares and common shares obtainable upon the exchange of the exchangeable shares
of Mattel’s indirect wholly-owned Canadian subsidiary, Softkey Software Products Inc., outstanding during each
period.
Diluted income (loss) per common share is computed by dividing reported net income by the weighted
average number of common shares, common shares obtainable upon the exchange of the exchangeable shares of
Mattel’s indirect wholly-owned Canadian subsidiary, Softkey Software Products Inc., and other common
equivalent shares outstanding during each period. The calculation of common equivalent shares assumes the
exercise of dilutive stock options and warrants, net of assumed treasury share repurchases at average market
prices, as applicable.
Areconciliation of weighted average shares for the years ended December 31 follows (shares in thousands):
2003 2002 2001
Common shares ............................................ 437,020 435,790 430,983
Effect of dilutive securities:
Stock options .......................................... 5,211 5,355 4,765
Warrants .............................................. — 147 418
Common and common equivalent shares ........................ 442,231 441,292 436,166
The following anti-dilutive securities were excluded from the calculation of diluted earnings per share for
the years ended December 31 (shares in thousands):
2003 2002 2001
Nonqualified stock options granted at:
Market price .............................................. 16,117 19,547 13,778
Above market price ........................................ — — 15,227
Warrants ..................................................... — — 3,000
16,117 19,547 32,005
Derivative Instruments
Mattel uses foreign currency forward exchange and option contracts as cash flow hedges to hedge its
forecasted purchases and sales of inventory denominated in foreign currencies. Mattel uses fair value hedges to
hedge intercompany loans and management fees denominated in foreign currencies. Mattel also entered into a
cross currency interest rate swap to convert the interest and principal amounts from Euros to US dollars on its
200 million Euro notes due 2002.
At the inception of the contracts, Mattel designates its derivatives as either cash flow or fair value hedges
and documents the relationship of the hedge to the underlying forecasted transaction, for cash flow hedges, or the
recognized asset or liability, for fair value hedges. Hedge effectiveness is assessed at inception and throughout
the life of the hedge to ensure the hedge qualifies for hedge accounting treatment. Changes in fair value
associated with hedge ineffectiveness, if any, are recorded in the results of operations currently.
Changes in fair value of Mattel’s cash flow derivatives are deferred and recorded as part of accumulated
other comprehensive loss in stockholders’ equity until the underlying transaction is settled. Upon settlement, any
gain or loss resulting from the derivative is recorded in the results of operations. In the event that an anticipated
transaction is no longer likely to occur, Mattel recognizes the change in fair value of the derivative in its results
of operations currently.
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